Investment markets have followed a simple pattern in recent years: Assets like shares and commodities move together, and then the bonds of safe countries, the Yen and the USD go the other way.
When investor confidence was on the mend the risk assets go up, and risk off ones like the bonds would be sold off.
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In his latest note, AMP Capital chief economist Shane Oliver writes that this could be changing, and it’s a good thing.
“It basically reflected the macro forces – emanating largely from the US and Europe over the last few years – that have dominated other more asset specific influences,” Oliver writes.
“Recently though RORO has shown signs of breaking down.”
The last two times the United States kicked-off a round of quantitative easing, it boosted all the risk assets.
This time, Bernanke’s bond-buying spurred equities and corporate debt, the Yen sold off like it should, but commodity prices dropped.
The Australian dollar has also come down and bond yields are range bound.
“It should also be stressed that the RORO phenomenon wasn’t normal.
“Rather it was a phenomenon of the GFC and the post GFC period where macro threats were so immense that they drove all listed growth assets to move together,” Oliver explained.
Now, Oliver said in the note, each asset class is being driven by its own fundamentals.
- Share markets have benefitted from reduced risks regarding global growth, a surge in high yield stocks as investors seek out better yields than bonds and bank deposits are paying and a pick up in cyclical sectors like consumer stocks
- Commodity prices are reacting to more negative supply and demand fundamentals – the supply of commodities is picking up after a world wide mining investment boom and this is occurring at a time when it increasingly looks like Chinese growth is settling around 7.5% down from 10% plus over the last decade
- The $A is reacting (at last) to the commodity price downtrend along with RBA interest rate cuts which are reducing the attractiveness of parking money in Australia at a time when the US is starting to look more attractive.
More downside in the $A is likely
- Bond yields have remained low as it’s become clear that interest rates are going to stay down for longer, particularly as inflation continues to surprise on the downside. In the US inflation is now just 1.1%, in Europe its 1.2%, in Canada its 0.4% and its now falling in the UK
Oliver says none of this means Macro risks have gone away. There’s still lots of economic problems around the world and they’ll keep being responsible for a lot of volatility.
It’s good news though, it means the world is starting to return to normal, Oliver said.
Investors still need to monitor macro economics, but these factors probably won’t be as overwhelming as they have been.
Basically, it means that the benefits of having a well-diversified investment portfolio will be seen more in the years ahead.
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