The BFG Report

Welcome to the 2016 Spring Edition of the BFG Report

Reserve Bank of Australia adopts a monetary easing bias

The Reserve Bank of Australia (RBA) lowered the cash rate unexpectedly by 25 basis points during the quarter to 1.75 per cent and in early August further cut the rate to an historical low of 1.50 per cent. Inflation was an important catalyst in the decision to lower the main interest rate because it is currently well below the RBA’s medium term target zone of two to three per cent.

Headline inflation for the first quarter recorded a very weak negative 0.2 per cent in the three months through March, leading to the annual rate falling to 1.3 per cent. This caught the share market by surprise and sparked concern about deflation. Deflation is difficult for the RBA to manage because it prompts consumers and businesses to delay consumption and investment as they believe prices will continue to fall.

The RBA was also concerned that the strong Australian dollar, which reached over US 78 cents at one point during the quarter, would hold back Australia’s economic progress. The RBA cut the cash rate again in early August owing to weakness in inflation caused by low wage growth, softer rental and housing construction markets and declines in the cost of business inputs.

Brexit — A ripple effect

Market performance over the June quarter was largely driven by the United Kingdom’s (UK) decision to leave the European Union (EU) in a shock 52 per cent in favour and 48 per cent against outcome that signalled the beginning of a lengthy period of uncertainty.

The initial market reaction sent markets plummeting by up to 9 per cent but concerns seemed to recede within a week as share market indices recovered to levels seen prior to the vote. The economic impacts are difficult to assess but the risks are predominantly centred on the Eurozone.

It is unlikely that Brexit will have a significant impact globally because trade with the UK is small for most economies. Less than 5 per cent of Australia’s total exports go to the EU, including the UK, so even a large decrease in exports to the EU will have a minimal impact on Australia’s growth.

The impact is expected to be localised within the Eurozone and this will be reflected in the EU and UK struggling to hit their 2016 and 2017 growth forecasts because business confidence, investment and consumption will be negatively affected over the short term.

We expect this will put pressure on the Bank of England and the European Central Bank to adopt additional monetary policy measures in 2016 to cushion the fallout from Brexit.

Investment Market Review – Quarter Ending 30 June 2016

Asset Class – Australian Shares
1 year return is 0.87% p.a.
5 year return is 7.20% p.a.
10 year return is 4.76% p.a.

Comments
The S&P/ASX 300 Accumulation Index was up 4.0% in the June quarter. The consumer staples sector, regarded as defensive, was the weakest performer down 3.9% as some companies including Woolworths and Wesfarmers faced greater competition and weaker margins. The strongest performing sectors were materials up 11.3%, health care up 10.1% and utilities up 7.4%.

Asset Class – Listed Property Trusts
1 year return is 24.59% p.a.
5 year return is 18.01% p.a.
10 year return is 2.87% p.a.

Comments
The REIT sector generated a positive return of 9.2% for the June quarter. The sector outperformed the general market again this quarter and whilst valuations look stretched and the sector appears expensive as ‘lower for longer’ rates will continue to support A-REITS.

Asset Class – International Shares
1 year return is 1.27% p.a.
5 year return is 15.36% p.a.
10 year return is 5.03% p.a.

Comments
International shares posted mixed results for the June quarter given the volatility associated with geopolitical events, such as, the UK’s decision to leave the EU. The S&P 500 gained 1.9%, the German DAX 30 was down 2.9% and the Nikkei 225 was down 7.1%. The MSCI World Index in Australian dollar terms was up 4.2% in the June quarter.

Asset Class – Fixed interest and cash
1 year return is 7.02% p.a.
5 year return is 6.74% p.a.
10 year return is 6.62% p.a.

Comments
International bond yields moved lower over the quarter. The benchmark 10 year Government bond rates in the US and Australia fell 30 and 51 basis points to close at 1.47% and 1.98% respectively. Yields fell on the Fed’s dovish outlook on interest rate hikes as markets no longer expect a rate hike in 2016. Additionally, the UK’s decision to leave the EU spurred a flight to safety which caused further decline in yields.

Asset Class – Cash
1 year return is 2.24% p.a.
5 year return is 3.10% p.a.
10 year return is 4.35% p.a.

Comments
The RBA lowered the cash rate by 25bps to 1.75% in the June quarter. Inflation was an important catalyst in the decision because it is well below the RBA’s medium term target zone of 2-3%. The weakness in domestic price pressures is attributed to low wage growth, softer rental and housing construction markets and declines in inputs to the cost of business. It is expected that the RBA will maintain its monetary easing bias due to declining terms of trade and weak domestic price pressure. In early August, the RBA reduced the cash rate to 1.5%.

High Yielding Internet Savings Accounts

Financial Institution and Interest Rate

ME Bank Online Savings – Rate 3.10% p.a.

St George Maxi Saver – Rate 3.00% p.a.

Bank of Melbourne – Maxi Saver – Rate 3.00% p.a.

Bank SA – Maxi Saver – Rate 3.00% p.a.

BankWest – Telenet Saver – Rate 3.00% p.a.

UBank – Usaver with Ultra – Rate 2.87% p.a.

Rates are subject to conditions and change.

Rates are correct as at 6/9/2016.