Monthly Report – February 2017
February saw a good run in markets that is now being accredited to the Trump effect. US share markets rose by 1.35% and the Australian ASX 200 rose by a similar amount (1.6%) from 5621 points at the end of January, to 5772 points at the end of February. Interestingly, the Australian dollar also rose by a similar percentage going from $US0.7567 to $US0.7688, which counteracted the gain in US markets, except where hedging was used. Some of the good news was tempered by a lifting both here and overseas in short term rates, or yields, that resulted in a drop in bond prices in the short term at least. Overall though, all our portfolios appear to have lifted through February.
The new Governor of the RBA, Phillip Lowe is starting to sound out a slightly different tune to that of the previous Governor, Glenn Stevens. In the March 7th RBA Board statement, the tone of the report was that inflation was under control, confidence was high and house prices, whilst high, were expecting to be moderated over time by increasing supply. Normally, that would mean the RBA would not be stoking the economy with ultra low rates, i.e. you'd be expecting a lift in rates from their current low position. Instead, the Cash rate was left unchanged at 1.5%. Lowe acknowledged the challenge the RBA faces, saying "An appreciating exchange rate would complicate this adjustment". His refreshing clarity all but confirms that a rise in interest rates now, or even the speculation about it, would see a lift in the Australian dollar, which would hurt our exporters, and tempt more of us to spend money on overseas goods and consumption. In effect, the RBA is damned if it does put rates up, and damned if it doesn't.
However, the rising interest rates overseas will force the hand of the Australian banks to put up mortgage rates here even while the RBA sits on its hands. The banks get around 40% of their funds for lending from overseas, so what happens in the US, Europe and Japan inevitably affects us too. For the first time in a while, we might see Australian savers celebrating and mortgage holders looking a bit glum. Property investors in particular will be the first affected, and we are already seeing this with CBA and others specifically lifting both property investor rates and the amounts of deposit that need to accompany new loans.
Ultimately, if the banks "independently" put up investment property and business loans by a reasonable amount (say 1%, which is the change in 2-year bond yields in the US over the last year), and home loans by a bit less (say 0.5%), the RBA will be able to sit on its hands and still get the result it wants for the next 6 months, I suspect. After that, it's likely to be forced to match other overseas Central Banks and start lifting official cash rates. We may see some turbulence in Bond markets, and to a lesser extent in our share market, when that happens. It's also quite likely that many market participants will act ahead of these expectations - timing will be the key to which managers and investors get it right, and which don't. As usual, we won't try and predict the outcomes of the individual managers - diversity of managers and styles, where possible, ensures a smoother result for the Future Funds' portfolios.