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August 2016 Market Wrap

The Australian sharemarket retreated a by 1.9% in August, following the strong gains (+6.3%) recorded in July. As expected, the Reserve Bank of Australia (RBA) cut the official Cash Rate to a new record low of 1.5% per annum early in the month.

Global investment markets were mixed in August. The US Dow Jones Index fell 0.2%, the London FTSE gained 0.9%, the Japan Nikkei 225 gained 1.9% and the Hong Kong Hang Seng Index gained 5.0% in the month.

The August rate cut by the RBA follows a global Central Bank trend to cut interest rates. The chart below shows the historical Central Bank policy interest rates for the "G3 economies".

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The cause of low interest rates around the globe is due to the perception that economic growth in recent years is disappointing, which in turn, has been attributed to the scale of the Global Financial Crisis endured in 2008.

However, when looking at developed economies (which are most responsible for today's extreme monetary measures) economic growth averaged 1.7% per annum in the five years to December 2015, compared with 2.8% per annum in the 5 years to December 2007.

While economic growth is down on historical levels, does this drop in growth justify such an extreme monetary policy stance by Central Banks?  Whenever extreme measures are taken in financial markets there is always the risk that you create another "boom-bust cycle" in other assets.

The challenge in the future will be for Central Banks around the world to determine when (and how) they can turn back to a 'normal' interest rate policy setting. It is unlikely in the near term in my view. However, take Europe and Japan as an example whereby you earn a negative rate of interest. Surely this doesn't make sense and will not last forever.

The Australian dollar retreated by 1.0% in August, with 1 Australian dollar currently buying 75.26 US cents. With the RBA board expressing a desire for a lower dollar to support the economy, don't be surprised if there is another rate cut later this year (perhaps on Melbourne Cup day in November).

For more information, please contact Ryan Love or Michael Clapham on 1300 856 338.

This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.