How the different asset classes have fared
(as at end February 2016)
The RBA left the official cash rate on hold at 2% for the 9th successive time at its 2nd of March meeting. The central bank last took action with 0.5% worth of cuts in the first half of last year.
The statement accompanying the decision made reference to the measures taken by APRA to dampen down property lending, particularly for investment properties. Frothy property prices, particularly in Sydney and to a lesser extent Melbourne, has been one factor staying the RBA’s hand from cutting interest rates further. This may now be less of a restraint, allowing the RBA to loosen monetary policy further in order to support the post mining boom rebalancing of the economy should this become necessary.
Bonds benefited from the continued risk adverse sentiment in February. This was despite many government bonds around the world (but not in Australia) sporting negative yields. That is investors are, in effect, paying governments for the privilege of lending to them. Bond investors seem more interested in return of their capital than the return on their capital. Expectations of deflation are also a factor; meaning while the nominal return is negative the real return could still be positive if prices fell further than the negative yield. In a world of negative interest rates the 2.5% yield on the 10 year Australian Government Bond doesn’t look too bad.
Although Australian shares finished in the red in February, there was a meaningful rebound in the second half of the month. At mid-month the All Ordinaries index was down by over 5%. Some recovery in sentiment globally saw investors, who sensed the New Year sell-off as overdone, stepping in and driving the market up. This provided some relief for shareholders of resource stocks, with the ASX 200 Materials sub index putting on 7.6% over the month.
The sharp falls that have characterised 2016 so far gave way to a bounce from mid-February that ameliorated some of the losses.
A recovery in the oil price, along with other commodities, was one factor in the improvement in sentiment.
US economic data later in February was also mostly positive helping to ease concerns that the world’s largest economy was tipping into recession.
Finally, concerns that central banks were out of ammunition eased. With the Bank of Japan and the European Central Bank still firmly in easing mode and the market pricing in little chance of the US Federal Reserve further increasing interest rates, markets seemed to believe stimulatory monetary policy would continue to back stop share markets.
1Bloomberg AusBond Bank 0+Y TR AUD, 2Bloomberg AusBond Composite 0+Y TR AUD, 3JPM GBI Global Ex Australia TR Hdg AUD, 4S&P/ASX All Ordinaries TR, 5MSCI World Ex Australia NR AUD, 6Vanguard Intl Shares Index Hdg AUD TR, 7MSCI EM NR AUD, 8S&P Global Infrastructure NR AUD, 9S&P/ASX 300 AREIT TR, 10FTSE EPRA/NAREIT Global REITs NR AUD