Market update: Summer 2015

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Market update: Summer 2015


There have been a series of small increases in some lending rates for housing, as banks seek to bolster their capital following recent changes in capital requirements. This is good for the banks, the additional capital makes them more secure, but it is being paid for by consumers. The Reserve Bank of Australia (RBA) remains on hold with official cash rates remaining steady at a historical low of 2.0%. The question of whether the RBA will cut rates further remains open. With no sign of inflation picking up, and early indications that housing prices are softening, there is scope for further rate cuts.


Australian bonds are likely to be caught between two competing forces, the slowing Australian economy should be positive for bonds; while the prospect for rate rises in the US could see bonds under pressure. How this balancing act plays out remains to be seen. Our best guess at this stage is that the former is the preeminent influence and that bonds appreciate modestly in price as the local economy slows.

Australian equities

The Australian share market sold off again in September, following on from the falls in August. Subsequently, October saw some recovery.

The resources sector continues to be out of favour even though the two big miners BHP and RIO hold world class assets and are the lowest cost producers of iron ore in the world. The banks and healthcare companies are clearly the market favourites. We have some concern that the amount of leverage inherent in the banks may pose some problems should a slowdown in China and the local economy lead to bad debts rising, and house prices falling. Healthcare companies look attractive in terms of industry dynamics, but are expensive relative to their own history.

International equities

The quarter ending September was not a good one for shares. It was also not a good one for the Australian dollar, but the depreciating currency provided some buffer from share price falls for currency unhedged investors in international shares.

As with the Australian share market, international markets rebounded in October. Emerging markets continue to look attractive from a valuation perspective, while US shares seem somewhat overvalued.

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