Monthly economic update with MLC, November 2019

Funds Management

by Clive Tompkins

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MLC Senior Economist Bob Cunneen speaks to MLC Portfolio Specialist Sinead Rafferty about another month of strong performance in global share markets, buoyed by optimism about the Phase 1 trade deal between the US and China.

Sinead Rafferty:
Welcome to this month's economic update. I'm Sinead Rafferty, Portfolio Specialist at MLC. And I'm joined by our Senior Economist, Bob Cunneen. Welcome, Bob.

Bob Cunneen: Thanks, Sinead.

Sinead Rafferty: Bob, it was another strong month for global share markets in November. What drove markets higher?

Bob Cunneen: Well, you saw Wall Street and the Australian share market make record highs. And we've had a couple of positive influences there. Mainly, it's on the talk about a trade deal between America and China. So, if we go back to October, President Trump announced that they had a Phase 1 agreement with China. And markets are optimistic that a trade deal is near, but nothing has actually been signed yet. So, it's a bit of a hopeful sign at the moment. We've also had the environment of low interest rates. So, you've had the American Central Bank and the Reserve Bank here cut interest rates three times this year, and that in particular has boosted share markets.

Sinead Rafferty: And yet there's a lot of issues in the global economy that markets could be concerned about, but seem to be discounting. Things like Brexit, Trump's impeachment, the Hong Kong protests. Why do you think the market isn't factoring that in?

Bob Cunneen: It's conscious of those risks, but it's driven by this optimism about the trade deal and the low interest rate environment. So, equities look attractive compared to the very low bond yields and the very low interest rates that we see around the world. So, investors have got limited choice in terms of the return outlook, and they feel the need to be in shares rather than in bonds or cash.

Sinead Rafferty: Now, you mentioned that the Australian share market got to all-time highs. We haven't seen that since before the global financial crisis, up over 3 per cent in November. Which sectors did particularly well?

Bob Cunneen: In Australia's case, it was really the Information Technology that was up about 10 per cent, and the Health Care sector was up about 8 per cent. But it was a broad rally across the board, because we've had this environment with the Reserve Bank cutting interest rates that investors are chasing returns.

Sinead Rafferty: So, what about the data that's come out of Australia in recent weeks, particularly unemployment? Are we starting to see green shoots or are things continuing as before?

Bob Cunneen: I would generally say that the economic data in Australia is very subdued. So, if you looked at the jobs data for October, we lost 19,000 jobs. The unemployment rate ticked up. If you look at car sales, they continued to be weak -- down about 10 per cent over the past year. Housing construction -- so, think about new buildings, apartments and the like -- down about 24 per cent.

The Australian economy in terms of the growth rate for the year to September was only 1.7 per cent, and that's a full per cent below our normal growth rate, around 2.7 per cent. So, generally, the data is on the weaker side. Against that we're seeing those green shoots in terms of the house price story. So, with the Reserve Bank cutting interest rates, you've seen a lift between 4 and 5 per cent in terms of house prices, particularly in the Sydney and Melbourne markets.

Sinead Rafferty: And finally, what about bond yields? We saw them move up in November. Is the market discounting further rate cuts globally?

Bob Cunneen: It's quite a mixed picture. So, in the case of the United States and Europe, bond markets are telling us that probably enough has been done in terms of interest rates. Whereas in terms of China and Australia in particular, they're starting to discount another interest rate move from those central banks, so they're still positive in terms of their bond markets.

Sinead Rafferty: Thanks for your time, Bob.

Bob Cunneen: Thank you very much, Sinead.

Sinead Rafferty: And thank you for joining us.