Sovereign European debt concerns re-emerged as an issue in May, pushing global markets into negative territory for the month.
The All Ordinaries Index fell 2.2% in May to close at 4,788.9 points. Global markets were all lower with the Dow Jones Index falling 1.9%, the FTSE falling 4.6%, the Hang Seng falling 0.2% and the Nikkei 225 falling 1.6%.
My analysis continues to point to a positive medium-term outlook for Australia. As a major exporter of commodities the global backdrop is supportive.
The terms of trade, up sharply from the low of 2009, is at a 60 year high and the mining sector is set for an investment boom. That story is well known and remains central to my positive outlook.
Raising the debt ceiling is the current ‘flavour of the month’ on the United States fiscal front, but of greater concern is the lack of debate on meaningful deficit-reduction. Annual budget deficits of over US$1 trillion and a debt to GDP ratio trending towards 100% are obviously not sustainable.
Having said that, the latest US earnings season has brought with it many a good performance to buoy the spirits of US equity investors. Almost 70% of the earnings results announced for Q1 have beaten expectations.
Data for the US economy continues to suggest that the recovery remains patchy and soft relative to history. The meek pace of this recovery is limiting many domestically-focused firms pricing power while the weak US dollar is further crimping margins.
In contrast, US firms with an offshore presence are in a much stronger position – particularly if they are exposed to high growth regions like Asia.
The Australian Dollar has maintained is strong levels despite the recent pull-back in global markets. The dollar is currently buying US107.19 cents.
The Reserve Bank’s latest growth and inflation forecasts imply very strongly that the tightening cycle is soon to be renewed.
The Reserve Bank of Australia left interest rates on hold in May, however at the RBA board meeting next Tuesday many economists have revised their forecasts indicating a ‘reasonable’ chance of a rate increase in June.
For more information please contact Ryan Love on 1300 856 338 or e-mail ryan.love@apexpartners.com.au.
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.