The BFG Report

Welcome to the 2016 Autumn Edition of the BFG Report.

US Rates Lift Off While Europe Continues With Easy Money

As widely anticipated, in December the US Federal Reserve; often referred to as the Fed, announced an increase in the federal funds rate by 0.25 per cent to a range of 0.25 per cent – 0.50 per cent. This was the first rate increase in almost a decade and signalled the end of an extraordinary period of US monetary policy following the Global Financial Crisis. The impact of the interest rate increase on share markets was slightly positive as investors were provided with some clarity after months of speculation regarding the timing of the Fed “lift off” and it also confirmed the Fed’s confidence in the improving fundamentals of the US economy. Economic data released during the quarter confirmed the continued strengthening of the world’s largest economy.

The Fed’s statement accompanying the rate rise implied that further increases to interest rates will be gradual and dependent on continuing evidence of US economic recovery. We believe that further interest rate increases are necessary in order to avoid deflation, reduce upwards pressure on asset prices (which could make conditions ripe for crash-type scenarios) and to enable the Fed to have sufficient fire power to stimulate the economy should the need arise. We envisage that US interest rates will be increased in a slow and measured manner and remain below ‘normal’ levels for some time to come.

The European Central Bank (ECB) continued its implementation of expansionary monetary policy in the quarter announcing a six-month extension to its quantitative easing program and cutting the deposit interest rate by a further 10bps to negative 0.30 per cent.

Australian Residential Property Comes Off The Boil

Concerns over the overheated east coast property market began to ease as 2015 drew to a close, and macro prudential policy moves made by the banking regulator through the year continuing to take effect. The auction clearance rate in Sydney tumbled from 76.30 per cent at the start of the quarter to 59.80 per cent by the end of December.

The RBA kept the cash rate on hold at a record low 2.00 per cent through the quarter as economic data released was broadly positive. Consumer confidence and retail sales data was strong and reports from retailers point to strong sales over the crucial pre-Christmas and Boxing Day sales period. The unemployment rate in Australia fell to 5.80 per cent and labour force data released in the quarter was well ahead of market expectations. Business confidence and business conditions figures were also strong.

Despite the largely positive macro indicators, sentiment over the Australian economy remains lacklustre. Australia continues to transition from a commodity-driven economy towards a greater focus on service industries. Many of these industries, including education and tourism, are beginning to reap the benefits of the decline in the Australian dollar over the past few years.

Recent trade data indicates that services exports now contribute more to domestic GDP growth than iron ore exports, for the first time in six years. Slowing Chinese demand for resources will certainly impact Australian exports, however, other sectors benefiting from the changing economic landscape will increase their contribution to GDP growth and help to offset this.

Investment Market Review – Quarter Ending 31 December 2015

Asset Class – Australian Shares
1 year return is 2.80% p.a.
5 year return is 6.67% p.a.
10 year return is 5.52% p.a.

The S&P/ASX 300 Accumulation Index delivered a 6.5 per cent gain in the December quarter.

The better performing sectors were consumer discretionary, up 13.0 per cent, health care, which rose by 12.4 per cent and financials, which improved by 10.6 per cent. The materials sector was the worst performer, with a decline of 7.4 per cent, as commodities prices came under further downwards pressure.

Asset Class – Listed Property Trusts
1 year return is 14.38% p.a.
5 year return is 15.25% p.a.
10 year return is 1.96% p.a.

The REIT sector generated a positive return of 6.0 per cent for the December quarter. Low bond yields remain a supportive driver for the sector as most A-REITs re-affirmed earnings forecasts for the current financial year.

Asset Class – International Shares
1 year return is 11.03% p.a.
5 year return is 15.14% p.a.
10 year return is 5.05% p.a.

International shares delivered positive returns for the December quarter. The S&P 500 gained 7.0 per cent, the German DAX 30 soared 11.2 per cent and the Nikkei 225 was up 9.6 per cent.
The MSCI World Index, in Australian dollar terms, produced a gain of 1.8 per cent.

Global markets recovered from the sharp correction in the September quarter as China’s central bank announced further monetary policy easing. In the Eurozone, the continuation of the European Central Bank’s quantitative easing programme led to improved investor sentiment. US economic data was generally positive with the unemployment rate falling to a seven year low of 5.0 per cent combined with the emergence of increased wages growth.

Asset Class – Fixed interest and cash
1 year return is 2.59% p.a.
5 year return is 6.62% p.a.
10 year return is 6.19% p.a.

Global bond yields moved higher over the quarter. The benchmark 10 year Government bond rate in the US and Australia rose by 23 and 28 basis points to stand at 2.27 per cent and 2.89 per cent respectively.

Domestically, rising yields over the quarter reflected an increase in market expectations of an interest rate rise by the US Federal Reserve, which then happened at the Federal Reserve’s December meeting.

Asset Class – Cash
1 year return is 2.33% p.a.
5 year return is 3.37% p.a.
10 year return is 4.52% p.a.

The RBA left the cash rate unchanged during the December quarter at 2.0 per cent. Stronger than expected employment data reduced the probability of another interest rate cut in the near term.

High Yielding Internet Savings Accounts

Financial Institution and Interest Rate

ME Bank Online Savings – Rate 3.60% p.a.

ING Savings Maximiser – Rate 3.50% p.a.

UBank – USaver with Ultra – Rate 3.37% p.a.

BankWest – Hero Saver – Rate 3.15% p.a.

Westpac ESaver – Rate 3.10% p.a.

ANZ – Online Saver – Rate 3.10% p.a.

Rates are subject to conditions and change.

Rates are correct as at 17/02/2016.