Monthly economic update with MLC, September 2018

Funds Management

by Clive Tompkins

MLC Senior Economist Bob Cunneen discusses the mixed performance of the global share market, volatility in emerging markets and the fall of the Australian Dollar.

Sinead Rafferty: Welcome to this month’s economic update. I’m Sinead Rafferty, Portfolio Specialist at NAB Asset Management and I’m joined by our Senior Economist, Bob Cunneen. Welcome Bob.

Bob Cunneen: Thanks Sinead.

Sinead Rafferty: We saw mixed performance out of global share markets in the month of August, with US markets performing very strongly, whereas negative returns out of Asia and Europe. What was the reason behind that divergence?

Bob Cunneen: The primary reason for the European and Asian share market weakness is really these concerns about President Trump, and his proposal to raise tariffs on imports into the United States. So for example if you’re a German car manufacturer, if you think about Mercedes, Audi and alike, you’d be concerned if the price of your car when it’s exported to the United States, will rise. And for German car manufacturers, this is a critical issue. Those exports are worth about $35 billion. So from their perspective, they’re going to lose access to these markets potentially.

In the case of China, it’s a similar story because President Trump has already announced $50 billion in tariffs, and he’s also proposing another $200 billion. So the prospect is we have this trade war that is intensifying around the world, because of what’s started by President Trump.

Sinead Rafferty: We’ve also seen a lot of volatility in emerging markets and particularly in Argentina, and in Turkey. Are we worried about a contagion effect?

Bob Cunneen: Yes we are, not because these countries are absolutely critical to the world economy, they are small economies. But the lessons of the Global Financial Crisis back in 2008, is that even small components of the world economy matter, because you have linkages between them. So in the case of Turkey, Turkey’s quite sensitive to Europe both in terms of economics and finance, as well as politically.

So if we look just simply at the financial linkages between Turkey and Europe, what you can see is a lot of European banks have lent money, as well as invested in Turkey. And hence, they are sensitive to Turkey’s fate. In the case of the political story, Turkey is of critical importance to Europe because it’s on the border of Syria. And as we’ve seen concerns about immigration in Europe, that relationship is quite acute, between Turkey and Europe itself.

In the case of Argentina that’s quite an interesting situation, where Argentina is now dealing with very high inflation, high interest rates, but a very large foreign debt burden. And Argentina is sort of like symptomatic, of those emerging nations that are probably taking on too much financial risk. And hence, we need to be conscious that those concerns can magnify around the world economy.

Sinead Rafferty: So what we’re seeing in emerging markets, is that one of the reasons for the fall that we’ve seen in the Australian dollar?

Bob Cunneen: Yes it is, because what we see with the Australian dollar is a very liquid, accessible currency for investors. And they use it as a proxy for emerging market exposures. So it’s a bit of a risk barometer. We’re also sensitive because we’re a commodity currency and some of these countries, such as Argentina, are major exporters. And because of that, the linkages between commodity prices and our currencies, makes us sensitive to what’s happening in emerging markets.

Sinead Rafferty: What about in the Australian share market, how’s that performed over the month of August?

Bob Cunneen: The Australian share market was surprisingly resilient, it was up about one per cent for the month. And what we saw in particular, two sectors strongly outperformed, telecommunications and the IT sector. In particular, telecommunications up about 13 per cent, because we had a merger announcement between TPG Telecom Limited (ASX:TPM) and Vodafone Group (LON:VOD). Against that, we had some weakness in the material sector, so they’re the resource related stocks. So they’re sensitive to the commodity price downturn that we’re seeing.

Sinead Rafferty: Thanks for your time Bob.

Bob Cunneen: Thank you very much Sinead.

Sinead Rafferty: And thank you for joining us. If you would like further information, it’s available on the website where you launched this video.


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