The risks of trying to pick future winning stocks

The risks of trying to pick future winning stocksIt’s tough for both professional and personal stock pickers to consistently beat or at least match the market.

But maybe many investors don’t recognise just how tough it is for stock pickers to succeed.

Recent research by a US academic underlines that pickers of individual stocks typically have a minimal chance of achieving a satisfactory return for the risks involved.

Professor of finance at Arizona State University Hendrick Bessembinder has compared how the approximately 26,000 stocks that have appeared on the broad US market between July 1926 to December 2015 have performed during their lifetimes against low-risk, low-return, one-month US Treasury bills.

Individual listed stocks tend to have a “rather short lifetime”, he notes. The median time that a stock was listed on the market was just seven years in the period covered by his research.

The findings of Professor Bessembinder’s just-released draft paper – Do stocks outperform Treasury bills? – may surprise you:

  • 58 per cent of the stocks failed during their lifetimes to beat the returns of the US Treasury bills.

  • Just four per cent of stocks, a little more than 1000 companies, were responsible for the “entire wealth creation” of the US stock market. (The other 96 per cent collectively matched the returns of the one-month Treasury bills.)

  • Only 86 companies collectively accounted for more than half of the wealth created by the market.

Perhaps the twist with this research is the overall US stock market strongly outperformed the one-month Treasury bills over the research period.

Keeping mind that just a few stocks were responsible for most of the gains, the research provides a resounding case for investors to invest much of their portfolios in low-cost index funds – rather than trying to pick winners.

If you try to pick tomorrow’s hot stocks, the likelihood is that you will pick the wrong ones.

Numerous investors, as Smart Investing has often discussed, choose to hold the core of their portfolios in low-cost index funds, tracking selected indices, together with a small selection of actively-managed funds and favoured individual stocks.

Interestingly, Professor Bessembinder has been quoted in the New York Times as saying that he personally invests in widely-diversified, low-cost index funds holding bonds and shares.

If you would like to discuss anything in this article, please call us on |PHONE|.

 

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.

Source:
Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2017 Vanguard Investments Australia Ltd. All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

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2017 financial year in review – John Owen

MLC 2017 year in review with John Owen

A rewarding year for investors

The financial year to 30 June was a very welcome contrast to the previous financial year when uncertainty was high and market returns were low. Despite political risks featuring prominently through the year and higher interest rates in the US, the financial year has been a rewarding one for investors (see Table 1).

The global economy’s improved performance over the past year and pick-up in corporate earnings were very supportive of share markets. Positive business surveys, rising consumer sentiment, solid jobs growth and lower unemployment have been evident across the US, Europe and Asia. This stronger global economic performance was sufficient to counter political uncertainty, especially in Europe where electoral success of anti-European Union parties was feared.

Table 1: Mainstream asset class returns (%) in Australian dollars – periods to 30 June 2017


Asset class

Returns *

1 yr

3 yrs (pa)

5 yrs (pa)

10 yrs (pa)

Cash

1.8%

2.2%

2.5%

3.9%

Australian bonds

0.2%

4.3%

4.3%

6.2%

Global bonds (hedged)

0.5%

5.1%

5.5%

7.5%

Global high yield bonds (hedged)

7.5%

5.1%

0.0%

0.0%

Australian property securities

-5.6%

12.2%

14.2%

-0.1%

Global property securities (hedged)

3.2%

8.7%

12.3%

4.2%

Australian shares

14.1%

6.6%

11.8%

3.6%

Global shares (hedged)

21.0%

9.6%

14.9%

6.4%

Global shares (unhedged)

15.9%

12.9%

17.8%

5.3%

Emerging markets (unhedged)

20.5%

8.7%

10.6%

3.3%

*Annualised returns. Past performance is not a reliable indicator of future performance.
Sources: FactSet, JANA Corporate Investment Services Limited.

Benchmark data include Bloomberg AusBond Bank Bill Index (cash), Bloomberg AusBond Composite 0+ Yr Index (Aust bonds), Barclays Global Aggregate Index Hedged to $A (global bonds), Composite benchmark of indices for MLC’s high yield managers (global high yield bonds hedged), S&P/ASX300 A-REIT Accumulation Index (Australian property securities), FTSE EPRA/NAREIT Developed Index hedged to $A (global property securities), S&P/ASX200 Accumulation Index (Aust shares), MSCI All Country World Indices hedged and unhedged in $A (global shares), and MSCI Emerging Markets in $A

Global shares are all “TRUMP-ed up” but risks are still evident

Global shares made robust returns over the past year, delivering 21.0% on a hedged basis.  The unhedged return was lower at 15.9% because the Australian dollar (AUD) strengthened against most of the world’s major currencies. The AUD’s resilience was surprising given that the US central bank has been raising interest rates while Australia’s economic data has been unspectacular. However, the rebound in iron ore and metal prices was particularly supportive for our currency.

In the US, the S&P500 Index gained 17.2% in local currency terms and achieved record highs. President Trump’s bold promises of corporate tax cuts, higher infrastructure spending and less regulation were supportive factors. European share markets also made remarkable gains given positive economic activity and encouraging business surveys. Germany’s was up 27.3% for the year and the French market gained 24.8%. Despite the uncertainty created by the surprise Brexit vote and the Conservative Party’s recent loss of their parliamentary majority, the UK share market increased by 16.9% as the weaker currency will benefit UK companies with offshore earnings.

Political risks were a major theme driving markets

Political risks featured prominently over the past year in terms of elections. Yet even with the dramatic headlines and surprising results, these elections have proven to be only temporary setbacks to risk taking.

Australia’s Federal Election in July 2016 started the political year of surprises with a narrow victory to the Turnbull Government. Turkey’s coup attempt in July 2016 caused some initial turbulence in emerging markets. The election of Donald Trump as US President in November 2016 was the major political event of the financial year. President Trump’s bold stimulus policy agenda inspired Wall Street. 

Even concerns over European political stability have proven transitory. Italy’s constitutional referendum setback in December with the resignation of Prime Minister Matteo Renzi had minimal impact. The early stages of the French Presidential campaign did cause some angst given Ms Marine Le Pen’s pledge for France to have a referendum on European Union membership. However the election of the moderate pro-European candidate in Emmanuel Macron as French President in May 2017 provided considerable assurance to investors. Britain’s general election in June 2017 provided the final political surprise with the Conservative Party losing their parliamentary majority, compelling Prime Minister Theresa May to seek the support of the Democrat Unionist Party to maintain power.  In March 2017, Britain finally triggered the start of a Brexit negotiation process. This political saga may have more surprising twists and turns ahead given the complex negotiations are due for completion in March 2019.

Central bank policies remain a key influence

With the global economy’s improved performance over the year, the central banks have been closely watching the markets, particularly the US.

The US economy recorded strong consumer spending and job gains. Notably the US unemployment rate fell to 4.3%, which is its lowest level since early 2001.  US price pressures have been reasonably contained with inflation running below the central bank’s 2% target. Given this healthy activity data, the US Federal Reserve (Fed) raised interest rates by 0.75% over the past year, which takes the Fed cash rate range to 1% to 1.25%. The Fed Chair Janet Yellen provided guidance that US interest rates should increase “a few times a year until the end of 2019”. This was welcomed by Wall Street.

In Europe, given the concerns over financial and political stability proved temporary, the European Central Bank has maintained low interest rates and the supportive asset purchase program. Europe’s unemployment rate fell to 9.3%, which is its lowest level since 2009.

Emerging markets enjoyed a sharp recovery…

The positive tone in developed markets extended to the emerging world with the MSCI Emerging Markets Index making a sharp recovery over the year, returning 20.5% on an unhedged basis. China’s share market gained 9% in response to the economy’s solid performance, which was driven by a large infrastructure spending stimulus program and a robust housing market.

There were also some very encouraging results for other key emerging markets. Brazil’s share market surged higher despite the political corruption scandals and the central bank aggressively cutting interest rates. India’s economic growth modestly slowed after the currency note swap (which invalidated India’s two biggest banknotes) in November 2016.  However India’s falling inflation and lower interest rates were supportive of India’s share market. Even Russia’s economy appears to be emerging from recession with the benefit of lower interest rates and despite the fall in oil prices which is Russia’s key commodity export.

…while commodity prices experienced a rollercoaster ride

It was a turbulent year however for commodity prices. Better global economic activity data, China’s infrastructure spending program and President Trump’s promises of accelerating US economic growth saw commodity prices surge initially.  Also notable was the agreement between the Organization of Petroleum Exporting Countries (OPEC) and Russia to reduce oil production.  This was the catalyst for oil prices to surge towards US$55 per barrel.

However this commodity rally faded by mid-2017, with the realisation that excess global supply outweighed the potential pickup in global demand.  Accordingly there were sharp falls recorded for the major commodities of oil, coal and base metals in the closing months of the financial year.

Iron ore also had a volatile performance during the year, rising strongly from US$55 to US$94 per tonne in February 2017, before fading back to US$65 per tonne in June 2017.

Bonds generally delivered modest returns

Global and Australian government bonds delivered modest returns as yields increased, due in part to higher US interest rates.  The rise in bond yields dampened the return of sectors such as listed property trusts, which until recently were favoured by yield seeking investors.

However there was some positive news in that global high yield bonds (hedged) had a very strong year with a return of 7.5%. Rising corporate profits as well as the promise of lower US corporate taxes saw credit spreads sharply narrow and corporate bond values rise.

Australia’s share market was a solid performer

Australia’s share market was stronger with the ASX200 Accumulation index rising by 14.1%. Favoured sectors were the resources laden Materials index which increased 25.8% and Utilities which was up 19.6%. While Australian bank shares were negatively impacted by the new levy announced in the Federal Budget, the Financials (ex-Australian Real Estate Investment Trusts, A-REITs) sector still managed to record a positive return of 20% for the year.   

Australia recorded mixed economic data over the past year. Australia’s annual economic growth at around 2% was subdued judging by historical measures. Despite better jobs growth, both the unemployment rate at 5.5% and underemployment rate at 8.8% remain high. Given this spare capacity in the labour market, wages growth remains subdued. Consumers have also been very cautious with their retail spending even though intense retail competition has constrained prices. Accordingly, Australia’s annual inflation has been sedate at 2.1% in the year to March 2017. In response to these mild wage and price pressures, Australia’s central bank cut the official cash rate from 1.75% to a historic low of 1.5% in August 2016.

In Sydney and Melbourne, lower mortgage rates have served to both extend the boom in residential property prices and support robust apartment construction. Australia’s business survey results have also been encouraging with the National Australia Bank survey showing strong gains for both confidence and conditions. The recent Federal Budget initiatives to raise infrastructure spending and cut small business tax rates have also been seen as beneficial by the corporate sector.

A ‘defensive’ portfolio stance is still justified

From a portfolio perspective, we have believed for some time now that it’s appropriate to be defensively positioned where possible in our MLC Horizon, Inflation Plus and Index Plus portfolios. Our view hasn’t changed. Markets are complacent despite the presence of numerous risks while valuations are stretched and expensive, so risk management remains foremost in our minds.   

We’ve been concerned that very low interest rates and large asset purchases by central banks have been the main driver of market returns, rather than economic fundamentals. President Trump’s promises of lower corporate taxes and higher infrastructure spending have simply added more fuel to this appetite for risk with investors chasing returns.  

Our defensive positioning is a function of these multiple risks, notably the continuing excessive level of debt in a number of countries, complacent market pricing, extreme monetary policy settings as well as limited room for policy manoeuvring in response to shocks.

This defensiveness has been achieved in a number of ways. We have maintained a low exposure to Australian shares. Our portfolios are holding more cash than is normal, including those managers we have appointed who have the discretion to hold cash to manage risk. We’ve maintained the allocation to alternative strategies which we believe will help preserve investors’ capital in volatile markets by providing potentially better returns. We have also taken steps to diversify the currency hedging in our multi-asset portfolios and we remain very selective of the type of fixed income we own in our portfolios.

In the MLC Inflation Plus portfolios, which have more asset allocation flexibility, we’ve also introduced a defensive Australian shares strategy. The new strategy enables us to increase our exposure to Australian shares – and benefit from the potential returns from this asset class – while carefully controlling the risk of these assets.

While these positions may not prevent negative returns in weak share market conditions, our caution should provide a degree of insulation.

How does MLC deal with uncertainty?

At MLC, we focus strongly on risk management. We believe managing risk for our investors is the sustainable way of generating returns for them – and in this unpredictable investment environment, it’s more critical than ever.  

As a result, we design and manage our multi-asset portfolios to be resilient in a wide range of possible market conditions. Using our market-leading investment approach, we constantly assess how our multi-asset portfolios are likely to perform in many potential market scenarios, both good and bad. We can then adjust our portfolios to manage possible risks and take advantage of potential return opportunities.

This careful analysis means our portfolios are widely diversified, risk-aware and positioned for many market environments.

If you would like to discuss anything in this article, please call us on |PHONE|.

 

Source: nab asset management July 2017

Important information

This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (MLC), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230 686) group of companies (NAB Group), 105-153 Miller Street, North Sydney 2060.

This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.

You should obtain a Product Disclosure Statement (PDS) relating to the financial product mentioned in this communication issued by MLC Investments Limited, and consider it before making any decision about whether to acquire or continue to hold the product. A copy of the PDS is available upon request by phoning the MLC call centre on 132 652 or on our website at mlc.com.au.

An investment in any product referred to in this communication is not a deposit with or liability of, and is not guaranteed by NAB or any of its subsidiaries.

Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. The returns specified in this communication are reported before management fees and taxes.  Share market returns are all in local currency.

Any opinions expressed in this communication constitute our judgement at the time of issue and are subject to change. We believe that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to their accuracy or reliability (which may change without notice) or other information contained in this communication.

This information is directed to and prepared for Australian residents only.

MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.

Bloomberg Finance L.P. and its affiliates (collectively, “Bloomberg”) do not approve or endorse any information included in this material and disclaim all liability for any loss or damage of any kind arising out of the use of all or any part of this material.

The funds referred to herein is not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds.

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July Economic Update with Bob Cunneen

July Economic Update with Bob CunneenIn this update, Bob Cunneen, Senior Economist talks to Jason Hazell, Head of Investment Communications, about key events driving markets during June.

They discuss:

  • Australian shares posting a mild monthly performance

  • European share markets falling sharply in June

  • Asian shares proving resilient, and

  • the major themes driving markets continuing to be President Trump’s bold stimulus promises and signals from the US and European central banks that interest rates are set to rise.

Download the 2 page – July economic & market update

In the latest update, Bob talks to Myooran about key events driving markets during May.

https://www.youtube.com/watch?v=FY06snnBCwM

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July 2017 Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The broad-based pick-up in the global economy is continuing. Labour markets have tightened further in many countries and forecasts for global growth have been revised up since last year. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. The rise in commodity prices over the past year has boosted Australia’s national income.

Headline inflation rates, having moved higher over the past year, have declined recently in response to lower oil prices. Wage growth remains subdued in most countries, as does core inflation. Further increases in US interest rates are expected and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively and volatility has been low.

As expected, GDP growth slowed in the March quarter, partly reflecting temporary factors. The Australian economy is expected to strengthen gradually, with the transition to lower levels of mining investment following the mining investment boom almost complete. Business conditions have improved and capacity utilisation has increased. Business investment has picked up in those parts of the country not directly affected by the decline in mining investment. At the same time, consumption growth remains subdued, reflecting slow growth in real wages and high levels of household debt.

Indicators of the labour market remain mixed. Employment growth has been stronger over recent months. The various forward-looking indicators point to continued growth in employment over the period ahead. Wage growth remains low, however, and this is likely to continue for a while yet. Inflation is expected to increase gradually as the economy strengthens.

The outlook continues to be supported by the low level of interest rates. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.

Conditions in the housing market vary considerably around the country. Housing prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease. In some other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases are the slowest for two decades. Growth in housing debt has outpaced the slow growth in household incomes. The recent supervisory measures should help address the risks associated with high and rising levels of household indebtedness. Lenders have also announced increases in mortgage rates for investor and interest-only loans.

Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Source: Reserve Bank of Australia July 4th, 2017

Enquiries

Media and Communications
Secretary’s Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033
Email: rbainfo@rba.gov.au

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Don’t become a one-eyed investor

Behavioural economists warn investors about a trap known as “confirmation bias”. This involves deciding on a course of action and then looking around for evidence to support that action.

The proliferation of online investment newsletters and blogs means that investors can almost immediately find someone, perhaps a so-called expert, who agrees with them.

In short, the trouble with “confirmation bias” is that it blocks out contrary opinions and research.

As investors try to come to terms with the outlook for lower returns in this low-interest environment, they may be particularly vulnerable to falling into the trap of “confirmation bias” as they seek to bolster their returns.

However, investors should treat the overload of opinions available as another form of market “noise” that must be carefully filtered so as not to distract them from their long-term goals.

Vanguard’s chief executive, Bill McNabb, recently warned that in times of increased investment uncertainty, it’s easier for investors to make bad decisions.

And this, writes McNabb, includes a greater likelihood of falling prey to “focusing on just the information that confirms our decisions”. In other words, “confirmation bias”.

A research paper, Understanding how the mind can help or hinder investment success* – published by Vanguard published several years ago, suggests that investors use a decision-making checklist. Such a checklist would include reasons why an investor should not take their proposed course of action or what could go wrong.

As renowned behavioural economist Dr Richard Thaler of the University of Chicago writes in his latest book, Misbehaving: The making of behavioural economics, people have a “natural tendency to search for confirming rather than disconfirming evidence”.

So, don’t be surprised if you suffer from at least a little “confirmation bias”.

 

Understanding how the mind can help or hinder investment success by Stephen Utkus, director of the Vanguard Centre for Investor Research, and a former Vanguard senior investment consultant, Alistair Byrne. 

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.

Source:
Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2017 Vanguard Investments Australia Ltd. All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page. 

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June Economic Update with Bob Cunneen

In this update, Bob Cunneen, Senior Economist talks to Myooran about key events driving markets during May.

They discuss:

  • Australian shares delivering a disappointing monthly performance

  • US and European share markets making solid gains in May

  • the political risks in Europe, the Middle East and North Korea as key themes driving markets, and

  • President Trump’s bold promises of corporate tax cuts and higher infrastructure spending continuing to be supportive of US shares.

Download the 2 page – June economic & market update

https://www.youtube.com/watch?v=qa2HMMsqV4U

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Global diversification through ETFs

Investors are increasingly using Exchange Traded Funds (ETFs) as a straightforward, low-cost way to gain exposure to overseas shares.

Recent ASX research shows that 40.9 per cent of assets in Australian-listed ETFs are in global shares, closely followed by Australian equities with 39.5 per cent, as at 31 May.

A fundamental decision for Australian investors is to consider how much of their portfolios should be exposed to overseas shares when setting the asset allocations for their portfolios.

Research has long shown that asset allocation is the primary determinant of a portfolio’s return viability and long-term performance. (The main asset classes are, of course, being local shares, international shares, property, fixed interest and cash).

When considering how much of their portfolios to direct into overseas shares, investors should keep in mind:

  • The Australian market is highly concentrated with a large representation in the financial services and resource sectors. (The top 10 Australian companies make up about half of the S&P/ASX 300 Index, with four out of the top five companies in the financial sector.)

  • Investing in a global equity fund that tracks the MSCI World Index (ex Australia), for instance, is a means to invest in the world’s best-known brands. (The top 10 companies in the index are Apple, Exxon Mobil, Microsoft, Johnson & Johnson, General Electric, Amazon, AT&T, Facebook, Nestle and Procter & Gamble.)

  • The MSCI World (ex Australia) Index comprises almost 1,600 companies listed on the exchanges of 22 of the world’s major developed economies.

Critically, investors using ETFs can easily rebalance their portfolios – including their exposure to overseas shares – in order to remain in line with their long-term strategic or target asset allocations.

If you would like to discuss anything in this article, please call us on |PHONE|.

 

Sources:

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2016 Vanguard Investments Australia Ltd. All rights reserved. 

Important:

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.

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June 2017 Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The broad-based pick-up in the global economy is continuing. Labour markets have tightened further in many countries and forecasts for global growth have been revised up since last year. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Commodity prices are generally higher than they were a year ago, providing a boost to Australia’s national income. The prices of iron ore and coal, however, have declined over recent months as expected, unwinding some of the earlier increases.

Headline inflation rates in most countries have moved higher over the past year, partly reflecting the higher commodity prices. Core inflation remains low, as do long-term bond yields. Further increases in US interest rates are expected over the year ahead and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively.

Domestically, the transition to lower levels of mining investment following the mining investment boom is almost complete. Business conditions have improved and capacity utilisation has increased. Business investment has picked up in those parts of the country not directly affected by the decline in mining investment. Year-ended GDP growth is expected to have slowed in the March quarter, reflecting the quarter-to-quarter variation in the growth figures. Looking forward, economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent.

Indicators of the labour market remain mixed. Employment growth has been stronger over recent months, although growth in total hours worked remains weak. The various forward-looking indicators point to continued growth in employment over the period ahead. Wage growth remains low and this is likely to continue for a while yet. Inflation is expected to increase gradually as the economy strengthens. Slow growth in real wages is restraining growth in household consumption.

The outlook continues to be supported by the low level of interest rates. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.

Conditions in the housing market vary considerably around the country. Prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases are the slowest for two decades. Growth in housing debt has outpaced the slow growth in household incomes. The recent supervisory measures should help address the risks associated with high and rising levels of indebtedness. Lenders have also announced increases in mortgage rates, particularly those paid by investors and on interest-only loans.

Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Source: Reserve Bank of Australia

Enquiries

Media and Communications
Secretary’s Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033
Email: rbainfo@rba.gov.au

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