During early June Royston Capital held its half yearly Smart Investor Market Update at the RACV City Club Presidents Room. Clients and guests heard from Ofer Karliner, Victor Yeung, Dean Italia (who filled in for Chris Black at the last minute) and myself. Aside from the lovely surrounds and sumptuous lunch that was provided, clients and guests were presented with our view of the investment world along with a brief update on legislative changes that are impacting many investors.
The US economy is showing signs of a soft patch particularly with consumer spending growth. This has been attributed to severe winter weather persisting longer than usual. It is at odds with elevated readings of consumer sentiment, confidence and evidence of rising household income and wealth. Ofer highlighted that manufacturing PMIs in the US, UK, EU and Australia were all improving and that incoming data was surprising on the upside.
Overall the US economy is now effectively at full employment which Dean Italia pointed out generally leads to increasing Fed Funds rate. However, it?s not quite that clear and simple. The Federal Reserve is caught between a number of bouncing balls: The severe winter; full employment; a need to normalise interest rates and the Fed?s balance sheet; and a set of promises (the one page double spaced tax plan) from President Trump that could boost or crimp economic growth depending on what Congress allows to pass.
Let?s not forget populist narrative that is negative on: international trade; migration; Government; the media; well…. everything really! This is embedded in thoughts and minds of many voters. Research shows there are clear divides between those with more versus less education on these issues and in the US Trump has played that card well.
As the Brits say, ?Keep calm and carrying on?.
Equity markets are following the data and are subsequently going up. But we have questioned if markets are being too optimistic. There has been a significant divergence in soft v?s hard data and the volatility index is the lowest in the history of the index.
In China our focus remains on financial?stability. Victor pointed out that there?remains reasonable capital outflow
from China, albeit at a slower pace. As?discussed last month, China?s debt?remains an ongoing concern and we are also watching population dynamics that point to a reduction in working population over the next 15 years and beyond.
Meanwhile in Australia, data has remained mixed and the RBA trapped. Retail sales growth is poor, wages growth is non-existent, consumer sentiment is low. Yet while the rest of the world has been deleveraging, Australian public sector debt has grown quickly and household debt to income has risen quickly. All of these issues concern the RBA and the tonic is an interest rate cut, but, property prices in the eastern states continue to soar and this is not a scenario that the RBA wants to fuel. We don?t see any immediate change to interest rates at the moment.