Cash and bonds
As widely anticipated, the US Federal Reserve finally moved off zero and increased cash interest rates by 0.25% in its last meeting of 2015 held just before Christmas.
A number of market commentators now view this as a mistake with no signs of inflationary pressures, financial market dislocation and data showing the US economy barely grew at all in the last quarter of 2015, all suggesting a rate rise wasn’t warranted.
While we are probably unlikely to see the Fed doing a complete backflip and cutting rates; it seems likely the pace of monetary policy tightening will be very gradual.
In Australia, the RBA sat pat for the 7th meeting in a row in December leaving the cash rate at 2%. With the ebbing of the mining boom a decent case can be made for the central bank to cut rates further in order to aid the difficult rebalancing to other sectors of the economy.
However, the RBA does not want to push residential property prices (particularly in Sydney) even higher and so has found its hands tied. Last year, non interest rate tools were introduced in order to dampen down some of the more speculative elements of the housing market. The effect of these “macro-prudential” policies has been the banks have increased interest rates on loans to investors in residential property. This in turn is now showing up in property price data, with prices flattening out over the last few months. It would seem then, that the RBA’s hands are no longer tied and we wouldn’t be surprised to see rate cuts in 2016.
This less than stellar performance of Australian shares reflects the fate of commodities generally as falling Chinese demand met increasing global supply. With mining and energy stocks making up a good proportion of the ASX the end result isn’t too surprising. Both the resources and energy sub-sectors of the ASX 200 lost a quarter of their value over 2015.
Other sectors had a happier 2015 and ensured the past year wasn’t a complete washout for Australian shares. Utilities were the top performing sector returning 23%. Consumer discretionary (18%), industrials (16%) and healthcare (16%) also did well.
The depreciating Australian dollar ensured currency unhedged international equities outperformed hedged last year. While it was a lot easier call to make when the Australian dollar was north of $1.10 US dollars, we think the Australian dollar still has room to fall a bit further as the Australian economy continues to negotiate the difficult transition forced upon it by the end of the mining boom.