Monthly Report – March 2017
March has been another good month for the local markets with the ASX 200 Index lifting from 5712 to 5865 - a 2.7% rise. Overseas share markets were largely flat, with the Australian dollar relatively stable over the month too. It went from $US0.7688 to $US0.7644. In the last two weeks however, it has dropped back to being $US0.7499.
Most of these changes can be put down to changes in the price of iron ore. Having been trading at around $US58 per ton in October 2016, it had rapidly risen to around $88 per ton through February and March, but it’s dropped back to around $68 in the last two weeks and our big iron stocks like BHP, Rio Tinto and Fortescue, and our dollar, have all tracked those gains and recent fall. It's likely then that next month's values will be down a little if that plays out over the rest of April, so don't put too much weight on the attached valuations!
If you recall last month I spoke about interest rates, with the conjecture that rates are likely to stay low for a while yet as the RBA finds itself in a bit of a bind. Because interest rates are so low, and household mortgage debt is so high (now 134% of GDP), it makes borrowers very sensitive to even small changes in interest rates. Apart from booming house prices and growth in mortgage lending, the rest of the economy isn't showing much growth at all. Inflation and wages growth particularly are under the RBA's preferred levels.
So, should the RBA put interest rates up to slow housing issues, or put rates down to address employment and growth in the rest of the economy? That is their dilemma. What we saw last week was a combined effort by our financial regulators -the RBA, APRA and ASIC, to all undertake prudential controls to slow housing, i.e. restrictions on lending conditions and particularly targeting property investor lending.
If the heat in the housing market is being addressed by prudential controls, it leaves the RBA free to leave interest rates where they are for the moment, hence my "rates will stay low" comment. Some market participants are even pricing in a small chance of a rate cut, but I suspect that's an unlikely change because it would only encourage more housing lending. For those who are interested, I've included a link to the ASX Interest Rate Futures Implied Yield Curve. If you've ever heard commentators say "there's a 10% chance of a rate cut next month", here's what they are using. It changes every day to reflect the markets interest rate projections and pricing.
The graph suggests there's little chance a rate rise in the next twelve months. Of course, the market participants can change their minds tomorrow if anything shifts their thinking and the graph changes accordingly, so you need to take its projections with a pinch of salt! One positive take away is that flat interest rates usually accompany average market returns - not too hot and not too cold!