13 things Australian investors can learn from overseas
SMH 1/1/2018
Many things affect the Australian stock market, including the state of the national economy, corporate profits, government policy (including corporate tax rates and interest rates) and business and investor confidence.
But Australian investors would be wise to keep an eye on international events, which can also severely impact the Australian stock market.
Three countries in particular are worth watching: the USA, China and Germany.
In the USA, six things are currently impacting our economy and stock market. The first of these is the President. Donald Trump’s regular announcements, including recent ones making trade with the USA more difficult with its major trading partners, are generally having a negative impact on investor sentiment.
The US currency is another factor that can have an impact on world stockmarkets, including Australia’s. The US dollar is considered to be a safe haven in times of turmoil and in recent months has been trading higher. This is currently crunching countries like Turkey, Argentina and Venezuela, which have heavy US-denominated borrowings. Turmoil in small countries can often have a knock-on effect in Australia. On the flipside is the fact that the Australian dollar has dropped to 71 US cents, which will make Australian exports more competitive.
US bonds are always worth keeping an eye on. In particular, the spread between the yield on two-year government bonds and ten-year government bonds has flattened to 24 basis points, from 100 basis points in December last year. If this relationship inverts (ie. yields on two-year bonds go higher than yields on ten-year bonds) be wary of a potential recession.
The US Federal Reserve holds several levers that can impact the US economy, and therefore the Australian stockmarket. The tightening of monetary policy (the US government’s base rate has recently moved from effectively zero to 2%) is affecting short-dated bonds the most, and is expected to have a dampening effect on the US economy. Meanwhile US government debt is currently US$18.5 trillion (18.5 thousand billion US dollars), which is more than 100% of the US Gross Domestic Product. Government spending under President Trump is only going higher.
Australian investors would also be wise to watch closely the US technology sector, which has enjoyed an extraordinary run in recent months, but is now looking a little overvalued. Having said that Apple Inc, now a $US trillion-dollar company, has a price-earnings ratio of only 19.9 times.
The other great world economic behemoth is China, where four things could impact the ASX.
The Chinese government is currently massaging its currency lower. In March this year the Renminbi Yuan was worth 6.3 to the US$. Today it is 6.85. We believe this is being done to counter Mr. Trump’s tariffs and is inflationary. A lower Renmimbi against the Australian dollar makes our exports to China less competitive.
The Chinese economy continues to grow strongly, which is a positive for the Australian stock market. However, defaults are rising in the Chinese corporate bond market, which is not good for the ASX. Equally, the Chinese government is applying tariffs on US goods, which will accentuate the trade war. This will impact investor sentiment.
Germany has the biggest economy in Europe, and remains the powerhouse of the European Union. Germany’s GDP remains strong, which is good for Australia, with which it trades goods. German manufacturing remains strong, which again will drive growth and confidence in Europe, which will have a positive knock-on effect in Australia.
Australian investors should also keep an eye on Brexit. Too much time is being spent worrying about this, which is concerning. A UK that exits quickly, and picks up the pieces and moves on, will be good for the Australian stock market.
(Courtesy of Sydney Morning Herald – 25 October 2018)
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