Broadly speaking, the June quarter saw equity markets continue their recovery from the poor start to the calendar year. However, a matter of days before the end of financial year saw one of the most unexpected global political events in recent memory, the Brexit vote. Despite volatility over the ensuing days, markets have generally recovered based on expectations of additional support from central banks globally. The recent Federal election as well as the election in the United States later in the year have also created the one thing investment markets do not like – uncertainty.
We are cognisant of the uncertainty over the process ahead for both the United Kingdom and European Union. Elsewhere in the world, the global economy continues to consider the expansion of quantitative easing measures in both Europe and Japan while the Federal Reserve in the US remains keen to gradually normalise policy (tightening from extremely loose settings). Adding a further element of uncertainty is the US Presidential election later this year. While we remain sanguine on the likelihood of another Clinton taking up residency in the White House, events such as those in Great Britain serve to remind us to expect the unexpected.
Closer to home, the Coalition’s double dissolution election also failed to follow the plan. Despite gaining re-election with the slimmest of minorities, the composition of the Senate now suggests its negotiating skills will be at a premium. As a result, we believe it far less likely the required long-term structural reforms will pass during this term of Parliament. We remain on alert for any changes to the Government’s superannuation policy announced in the most recent Budget.
The Australian equity market has rallied strongly ahead of another company reporting season starting in August. However, we believe the macro environment is one that doesn’t warrant a market trading near its 12 month highs. The domestic economy continues to awkwardly balance the effects of the end of the resources boom while it concurrently attempts to avoid an overheating east coast residential property market. Wage growth is at record lows and the labour market is materially weaker than headline figures suggest. We expect the Reserve Bank to cut rates further as it attempts to provide support to a benign economy.
It is for these reasons we expect company management to announce somewhat tempered outlook commentary for the year ahead. We believe this may well disappoint the expectations currently priced into the equity market. In anticipation of this, where appropriate, we have been actively managing equity positions, taking comfort in holding higher levels of cash. While acknowledging cash returns are low, we feel this provides us with a better ability to take advantage of opportunities should they arise.