1

Market Watch

Global economic outlook

Australia

The Reserve Bank of Australia’s

(RBA) decision to keep interest

rates on hold in its 5 April meeting

was supported by mixed activity

in the Australian economy.

Consumption has slowed with

retail sales data weaker than

expected and jobs growth slowed

sharply to 2.1% y/y in February

from 2.9% y/y in November last

year.

By contrast, business sentiment

remains reasonably positive with

the NAB Monthly Business

Survey for February showing a

strong increase in capital

expenditure for firms and a

rebound in conditions for mining

and wholesale businesses.

United States

The US Federal Reserve (Fed)

March Federal Open Markets

Committee (FOMC) meeting was

a key focus last month with the

decision to maintain current rates

and policy.

Most economic data released

since the meeting has been

positive for the US growth

outlook, with the manufacturing

Institute for Supply Management

(ISM) survey indicating the sector

expanded in March above

expectations. This was also true

of the non-farm payrolls report

(for goods, construction and

manufacturing companies) with

the most gains for those in

sectors exposed to the domestic

economy.

Latest monthly commentary from the Investment

Markets Research team at BT.

April Review 2016

INSIDE THIS ISSUE

1 Global economic outlook

Australia

United States

Japan

China

UK

Eurozone

2

Asset class outlook

Australian Shares

International Shares

Australian Fixed Interest

International Fixed Interest

Commodities

Properties

2

Japan

Latest economic data suggests Japan’s

economy has continued to weaken in early

2016 with slumps in consumer sentiment, job

situation and household financial positions. The

Bank of Japan (BOJ) March quarter Tankan

Survey also showed weakness in business

sentiment with the large manufacturers index

dropping to 6 for the first quarter compared to

12 in the last quarter of 2015. This is its lowest

level since mid-2013.

Source: BT Investment Solutions & DataStream

China

There have been encouraging signs the

stimulus measures announced by the Chinese

government and the People’s Bank of China

(PBoC) are starting to impact on growth. The

services sector continued to expand with the

headline services PMI increasing to 53.8 – its

highest level since December and a marked

improvement on February.

There were also positive increases for the

official manufacturing index with new orders at

their highest level since October 2014, auguring

well for manufacturing activity in the near term.

United Kingdom

Concerns over the European Union referendum

and budget announcements impacted on

confidence in the UK. Growth in the British

economy was subdued in March, though the

latest Markit/Cips Purchasing Managers’ Index

(PMI) saw the services sector rise to 53.7

(compared to 52.7 in February) and saw

increases in the manufacturing and construction

sectors. Growth in new business in the services

sector was at its slowest pace since January

2013 according to the index.

Eurozone

The European Central Bank (ECB) revised its

forecasts for inflation and GDP growth in its

March policy meeting and implemented further

stimulus measures. It also announced a new

series of four targeted longer-term refinancing

operations to start in June 2016. The revised

forecasts project inflation to rise by 0.1% year-

on-year (compared with December forecasts of

1%) and anticipate GDP to increase by 1.4% in

2016, 1.7% in 2017 and 1.8% in 2018.

Source: BT Investment Solutions & DataStream

3

Asset class outlook

What’s Been Happening in the Markets?

Source: BT Investment Solutions & DataStream

Australian Shares

March was a positive month for Australian

shares as they continued the rally from

February and resources were a particular

beneficiary. Looking forward, the economic

backdrop has not changed with sluggish growth

globally and a lack of cyclical tailwinds, but we

do not foresee a major downturn. Domestically

the outlook is for sub-trend growth as the

economy continues to transition from mining

investment to non-mining investment, consumer

-driven and other industries such as tourism and

education. With subdued business investment

– a lack of ‘animal spirits’, growth will be

sourced from the government and the

consumer. Dovish central banks and

commodity prices put upward pressure on the

Australian dollar during the quarter; but it is

likely to weaken again from here which will

support the growth sectors, along with offshore

earners. An easing interest rate cycle is also

expected the buoy the economy.

International Shares

Sharemarket volatility, particularly in the US,

declined in March. Asian shares rallied to the

greatest extent during the month.

Our central scenario is for global equities to

deliver around 9% hedged and similar

unhedged over the next 12 months,

outperforming other asset classes. Our return

expectations continue to be based

predominately on expected earnings, rather

than any further revaluations. Valuation

expansion has been a key driver of equity

returns in recent years but we continue to

believe that there is less scope for multiple

expansion going forward given valuations in

most developed markets are at the high end

of their ranges and we expect higher volatility

ahead. As long as the macro environment

remains supportive and there are no shocks, we

do believe high valuations can be sustained.

Consequently, there is scope for greater

dispersion and more sensitivity to headlines.

Our forecast comprises 4-5% from earnings

growth, 3% from dividends with the remainder

of the return being possible valuation

movement. Returns for hedged and unhedged

are now similar as we believe the Australian

dollar will likely remain at similar levels over the

next 12 months.

Australian Fixed Interest

Australian 10 year government bonds rose in

March. Australia remains fertile ground for

foreign issuers. Bond managers in Australia last

year were happy to lend to the Apples of the

world and this is expected to continue. Certainly

the breadth of the domestic market remains

interesting, and there is plenty to pick from to

diversify a portfolio. The ability to express

global views through an Australian fixed

interest portfolio continues to increase. We

expect a return of 2.7% from this sector in

the coming 12 months.

4

International Fixed Interest

US 10 year government bond yields initially

rose but slid near the end of March off the

back of comments from the Fed. By contrast,

Eurozone 10 year government bond yields

ended March slightly higher compared to

February. We expect to continue to see

negative interest rates in various countries,

especially in Europe. The effectiveness or

otherwise of such dramatic monetary policy

measures is indicative of the unchartered

waters we find ourselves in. While some

countries are beginning to show signs of

economic recovery, which markets have

largely viewed positively in recent months, we

run the risk of returning to that good news is

bad news environment, where positive data

increases the risk of a rate rise, spooking

investors.

Commodities

A weaker US dollar has in recent times

provided some relief to the downward

trajectory of commodity prices. The recent rally

in Energy may have more to do with short

covering than a significant change in

fundamentals. There has been some supply

reduction from the US but a further critical

factor will be the ability of OPEC producers to

agree on production caps. However, even if

they do, there is currently a significant glut in

world markets which will take a long time to

clear.

Property

Australian Real Estate Investment Trusts

(REITS) continue to offer attractive yields.

While there is continuing reappraisal of risk

and return requirements for all investment

classes, real estate securities valuations

currently appear fair by longer-term standards,

given a relatively attractive yield and solid,

fundamentally driven earnings growth

prospects. On a relative basis, global real

estate trusts could continue to outperform

other asset classes given their more durable

near-term earnings growth, attractive dividend

profile and discounted valuation levels. We

see the current yields on REITs as attractive

and safe, with the prospect of another year of

dividend growth.

Source: BT Investment Solutions and Datastream

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