Cash rates have stabilised at low levels. The RBA has lowered overall cash rates in order to support the post mining boom adjustment of the Australian economy. The RBA has cut the target cash rate twice this year by 0.25%, in May and then in August, bringing it to a new historical low of 1.5%. The RBA then left the rate unchanged at its September and October meetings. The market is expecting the RBA to continue to sit pat over the coming months with another cut possible later in 2017.
Bonds did well in the first half of this year as investors fretted about a slowing Chinese economy overwhelming the tepid recoveries in Europe and the US; and dragging the world into recession. With the help of Chinese fiscal and monetary stimulus these fears receded and the demand for safe haven assets like government bonds lessened.
Meanwhile the US economy continued to move towards full employment, causing increased speculation that the US central bank would begin to raise interest rates. These two factors saw very low bond yields around the world creep up slightly recently and the bond rally flatten out over recent months. However, returns over a longer time periods still look very respectable for a defensive asset class.
Chinese stimulus has led to a lift in construction activity and a resulting increased demand for commodities like iron ore. This has helped the mining company heavy Australian share market to outdo international shares over the 12 months to the end of September.
The rebound in commodity markets has driven an appreciation of the Australian dollar this year. This has meant currency hedged international shares investors have done better than unhedged. Infrastructure and property stocks experienced a mild correction over the September quarter. With central banks around the world pushing bond yields to extreme lows investors have sought out alternatives.
Defensive high dividend stocks like infrastructure and property are prime examples of these “bond proxies”. With some of the heat coming out of the bond rally over the September quarter, the bond proxies also gave up some ground. Emerging markets were the best performing asset class over the September quarter, with compelling valuations attracting interest.