‘Caution’ to continue

I had hopes that the end of the year would see a settled period in the world economy, but it appears that the themes I have previously talked about are continuing.  With all that is going on in the world right now, I remain cautious and optimistic for improvement into 2015.

Oil prices

Oil prices falling are helping to reduce my fuel bill by $20 each time I fill up so we all have a few extra dollars in our pockets as a result of such low oil prices.  Russia is under immense pressure, and I think they are the real target, with their currency and sharemarket in free-fall.  We have seen a slight rebound in oil prices but Russia’s central bank does not seem to be able to do anything to help against their economic woes.  A possible consequence is an economic collapse in Russia, and this danger has resulted in sharemarket volatility we have seen over the past few weeks.  In the US,  consumers are major beneficiaries of a low oil price but there are a number of oil companies in the US who will default on their debts if oil prices stay low, although we would need to see low oil prices for an extended period to see companies default on their debts.  One questions how long low oil prices will last.  Saudi Arabia, appear to have a lot of patience, so I think there are some bigger geo-political events at play. I am sure that we would be hearing cries from the United States if the US was the target.

Russia

Russia’s response to economic sanctions and low oil prices is impossible to predict.  Russia could ask for help from China and this would provoke some interesting reactions from the US.  The below link provides some interesting reading about Russia’s possible actions. http://www.bloomberg.com/news/2014-12-19/did-china-float-a-bailout-offer-for-crisis-hit-russia-.html

America

The US economy is still showing signs of slow improvement.  Janet Yellen, the Chair of the Federal Reserve has suggested that interest rates are likely to rise in 2015, possibly as early as April due to the better market conditions.  This is confirmation that the US economy is heading in the right direction.

Australia

The Australian Government heralds more doom and gloom.  Joe Hockey is ‘our worst treasurer in 40 years’ apparently so that gives you an indication of the level of pessimism in Australia right now.   I suspect that we are likely to see more attempts to bring balance to the budget and we won’t see conditions improve until towards the middle of next year.  If America’s economy shows further improvement, and interest rates rise there, then our dollar will trend lower and that will be helpful to our economic growth.  With resource prices falling, the falling Australian dollar will help to reduce the impact of falling commodity prices.  Also falling Australian dollars makes our exports (mainly agricultural exports) more competitive to overseas markets. 

Europe

Recent inflation date in Europe stayed stable at an extremely low 0.3% with risks of falling into deflation.  The ECB is expected to purchase Government bonds to attempt to stimulate growth but the question is, will there be enough money printed to help improve growth in the Eurozone? Greece is in the process of electing a new president, and if they fail after three rounds, then a snap election would be held and indications that the Syriza party would win and they promise to renegotiate the bailout conditions imposed on them.  I don’t expect this to be a major event but certainly one that may cause some concerns in sharemarkets.

Overall, there are a few headwinds of which to be wary, so on balance, it makes sense to remain cautious at this time.

Author:  Stuart Gilchrist – Director / Senior Financial Planner

Gilchrist Wealth Management

“The views expressed in this publication/website are solely those of the author; they are not reflective or indicative of Fortnum Private Wealth’s position, and are not to be attributed to Fortnum Private Wealth. They cannot be reproduced in any form without the express written consent of the author”

In sharemarkets we have seen a period of volatility over the past few weeks which has seen mixed reports.  Some news was better than expected, and some economic data did not meet expectations.

The USA has seen better economic data, in particular improved employment figures.  This could represent a tipping point for the US economy in a positive direction, as better employment leads to better spending which improves business confidence, and businesses tend to invest and employ more when they are confident.  I don’t think we should celebrate just yet, but this is encouraging news.

China data is mixed, but overall shows a continued slowing of their economy which is why Australia has struggled.  A general slowing of such a large economy will have an impact on the world economy so a sudden change could have implications to watch out for.

Australia is suffering from lower commodity prices (iron ore, coal etc), which has helped our dollar to fall.  One of the biggest concerns is wage deflation which I have been noticing for some time.  Together with falling commodity prices there is now talk about the Reserve Bank lowering interest rates further.  I think a lot of the blame for the stagnant economy is how much the Government has been creating uncertainty in the economy through their policies.  I don’t think that is going to change anytime soon by the looks of things so there is a chance that government policies could tip the balance in favour of falling rates.  There are still risks to our economy, particularly in the face of a shock that arrives from overseas, but given the right government policies and good news from overseas, we could see our way clear of the worst.  Interestingly, the David Murray report on the banking world has shown that there are some significant changes to the way that banks may be required to operate to reduce their reliance on a Government bailout in event of a default.  Banks may face falling profits if the recommendations are adopted or they may have to increase interest rates to offset the higher costs the recommendations will incur.

Latest developments in Europe are a concern.  It appears that what the markets were expecting that a stimulus package would be implemented with little resistance, but it appears that there is a split in the board members of the European Central Bank which does not assure action.  Deflation is a real issue in Europe and the falling oil price is going to make that worse.  The ECB states that they will consider other alternatives for helping the economy if the this current amount of easing is insufficient to slow the move towards deflation.  If they take too long to fix these issues, voters in Europe will become further dissatisfied and we would expect to see a rise in anti-Euro sentiment which could lead to unpredictable outcomes, and therefore volatile sharemarkets.

Stuart Gilchrist – Director / Senior Financial Planner

Gilchrist Wealth Management

“The views expressed in this publication/website are solely those of the author; they are not reflective or indicative of Fortnum Private Wealth’s position, and are not to be attributed to Fortnum Private Wealth. They cannot be reproduced in any form without the express written consent of the author”