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August 2018 Market Wrap

Notwithstanding political turmoil in Canberra, resulting in a new Prime Minister, Scott Morrison, the Australian share market continued its recent trend of gains. The All Ordinaries index closed the month of August 1.0% higher at 6,427.80 points. That said, the Australian Dollar fell by 2.9% in the month, with 1 Australian dollar currently buying 71.89 US cents.

Once again, the Reserve Bank of Australia (RBA) board kept the official Cash Rate on hold at 1.50% per annum. The RBA board is expected to keep the Cash Rate on hold when they hold their monthly meeting tomorrow.

Global share markets returns were mixed in August.  The United States' Dow Jones Index gained 2.2%, the London FTSE fell 4.1%, the Japan Nikkei 225 gained 1.4% and the Hong Kong Hang Seng Index fell 2.4% in the month.

Added to the mix of issues for the RBA board to consider at tomorrow's meeting is the political turmoil in Canberra, and the impact (if any) that this will have on business and consumer confidence (and by extension economic growth).

History suggests that a Liberal/National government has presided over a period of stronger Australian share market returns as shown in the chart below.

Screen Shot 2018-09-03 at 9.29.51 am

Source: Thomson Reuters, AMP Capital

It may be argued that the Labor governments led by Gough Whitlam in the 1970s and Kevin Rudd and Julia Gillard more recently, had the misfortune of severe global bear markets. Nevertheless, with the last possible date for a Federal Election being November next year, and given the state of the polls, it does seem likely that investors should prepare for a change in Federal Government.

The Labor platform of tax reform announced already includes abolishing negative gearing, and also abolishing the refund of excess franking credits. Both of these policies adversely impact investors.  However, I am sure that there will be several additional policy announcements to consider in the lead-up to next years' election.

Of note during the month, and as I have written in recent monthly newsletters, Australian banks currently fund around 20% of their loan books from overseas borrowings. I have cautioned that with global interest rates increasing, banks may need to pass on their higher funding costs (by way of increased mortgage interest rates for borrowers).

Late last month, Westpac was the first of the major lenders to increase their mortgage interest rates out-of-step with the RBA cash rate changes. Westpac increased its interest rates for home mortgages by 0.14% per annum, with Suncorp and Adelaide Bank subsequently announcing a similar move – and other banks likely to follow suit this week.

Higher interest rates are generally not good for the property market. Against a backdrop of the Sydney property market falling by 5.4% over the year to July 2018, I am sure that this is another thing to be closely monitored in discussions at the RBA board meeting tomorrow.

For more information, please contact Ryan Love 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.