Keep calm and carry on.
The Ministry of Information was formed by the British Government as the department responsible for publicity and propaganda during the Second World War. A number of morale boosting posters were designed to be displayed across the British Isles during the testing times that lay ahead. The third and final poster was to be issued only upon the invasion of Britain by Germany. As this never happened, the poster was never officially seen by the public. It is believed that most of the Keep Calm posters were destroyed. However, about ten years ago a copy resurfaced and the rest as they say is history. I receive a 'Keep calm and carry on' desk calendar from the kids for Christmas, possibly a subtle message being delivered.
The future is uncertain.
We have some certainty from the US with Trump because many of his plans will get enacted. The Republicans have control of Congress – both the Senate and the House by slim margins. Recent history does show that when a party holds the presidency and controls Congress, economic growth improves. Financial markets have recognised that lower tax rates, less business regulation, combined with defence and infrastructure spending will most likely be positive for business investment and US economic growth. Financial markets are also adjusting to the possibility that the US Federal Reserve will likely be increasing interest rates at a faster pace over the next twelve months, keeping animal spirits in check. How will he pay for it? Debt. The Obama administration has nearly doubled the US debt from $10.6 trillion to $19.9 trillion. Debt levels are going to continue growing as governments scramble to placate voters.
The Brexit vote, the Trump result, upcoming referendums and elections in Italy, France and Germany reflect the growing divide around the impacts of globalization and free trade, and the consequences being high youth unemployment and immigration issues. People are not only fleeing countries due to war, but also looking for work, and in the case of Europe, a generous social welfare system. It is important to remember that restrictions on international trade arguably led to the Great Depression in the 1930s.
Australia has been fortunate, China is our largest trading partner and largely determines the price of commodities, iron ore prices have increased from under $40/t at start of 2016 to around $75/t today. Australian coking coal prices have tripled in last six months to $300/t. China has increased its steel output and at the moment there is a cyclical up-tick in global economic activity which is benefiting Australia's bottom line, however offset by weak wages growth in real terms.
We expect interest rates to remain low, with debt levels where they are no government can handle sudden increases in interest rates, the cost of servicing the debt will rise too quickly. We expect that governments will relax the purse strings and increase spending in an attempt to generate economic growth, or at least keep people working. Employment and wages growth is the big issue around the globe.
Japan offers an insight into the challenges facing many countries, an ageing demographic with more people working longer hours. There is evidence that an ageing work force puts downward pressure on real wages thereby reducing consumption and lowering economic growth.
Gross domestic product (GDP) is often used as an indicator for economic growth. GDP is the sum of consumption or consumer spending plus government spending plus investment including business capital investment, plus total net exports (exports less imports). There are a number of drivers to consider, but if consumer spending declines and business investment is not occurring, GDP is likely to fall, and this is what has been happening in developed economies for some time. Australia enjoyed the mining boom but that capital investment phase is coming to an end.
Looking ahead the following are important for our economy and financial markets:
The direction of the $US, it is rising, if the trend continues that keeps our exports competitively priced. A stronger $US will likely lead to higher US interest rates. This combination could pose some risks for financial markets in 2017 and beyond.
The commodity price rally may run out of steam as the positive impetus from China begins to wane. It will be interesting to see if the share prices of resource companies decline on any falls in underlying commodity prices. The listed resource companies have reduced their dividend payouts which make them less attractive to investors seeking income.
There are always uncertainties and how markets respond is uncertain. We see no reason at the moment to be making major shifts in investor asset allocations. Keep calm and carry on.
This information is general in nature and does not take into account your personal goals, objectives or financial situation. Personal advice should be sought prior to making any investment or strategy decisions. Cameron Diffey is a Director and Financial Advisor of Johnsons MME Financial Advisory Pty Ltd ABN 30 141 828 033 and is authorised to provide advice on behalf of Johnsons MME Financial Advisory.
Cameron is a Chartered Accountant Financial Planning Specialist, has completed a Bachelor of Business (Accounting/Economics) and a Graduate Diploma in Applied Finance with FINSIA. He has been working in financial and business services since 1995.