- Australian and Global Shares have fallen notably over the past two months, in particular the Australian ASX200 share market has fallen 10% in the period. As per our ‘Additional Market Update’ in late October, this has been driven by concerns over a number of global/political issues including:
- The US-China trade dispute
- Instability in Europe due to Brexit negotiations and a new government in Italy putting pressure on the EU
- Rising interest rates in the US to slow US growth and impact on company profits;
- However, last week the US Federal Reserve updated its outlook on US interest rates, stating that it now sees current US rates at being closer to the neutral/appropriate level. This is a notable shift compared to a number of months ago, and is therefore likely to result in only 1 -2 further rate increases before it takes a step back and monitors the affect of higher rates on the economy. With the cost of debt not expected to increase as much as anticipated, this will have a positive impact on US company profits and removes or at least reduces this risk from the market.
- Furthermore, when looking through the ‘market noise’ of opinions regarding the broader global economic environment, there remain a number a number of strong positive factors for companies around the world. This includes:
- The US maintaining its ongoing economic strength, whilst growth is not expected to be at the same exceptionally high level previously experienced, growth is still expected to be above its long-term average for the 2019 calendar year. Additionally, despite domestic political issues, both main parties continue to support further infrastructure spending, providing an ongoing boost to the US economy.
- Additionally, oil prices have also decreased from short-term highs. This helps the global economy, and in particular a significant boost to US consumers which are much more influenced by the price of gas vs other consumer spending.
- In Australia, earnings forecasts for companies for the 2019 and 2020 financial years have actually increased. This suggests that recent market falls in Australia have been driven by investors selling down as they wish to be cautious about holding higher risk shares compared to cash or bonds, rather than being a result of future profit downgrades.
- The Chinese economy is showing signs of stabilisation after the implementation of government fiscal support measures to boost the economy.
- Over the weekend, in one of the most important political meetings of recent times, US President Trump met with Chinese leader Xi Jinping to discuss US-China trade. A 90 day reprieve to the additional significant tariffs that were to be implemented by the US on Chinese goods automatically on January 1st has been agreed upon. This was the best outcome hoped for from this meeting and will provide markets with some optimism that a resolution can eventually be reached.
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