They say that “context is everything” and this was certainly demonstrated in January with global markets perceiving the world economy in a dramatically new light to last year despite a similar world economic backdrop.
In terms of commodities, there is a natural limit to commodity price falls, that is, lower prices will eventually lead to cuts in production leading to the demand/supply equation turning back in favour of demand, eventually supporting prices. In addition, lower commodity prices – especially lower oil prices – are a positive for the rest of the economy.
The Australian economy is re-balancing from the mining investment boom, with the lower exchange rate a key enabler. Growth is coming from strong construction, healthcare, professional services, tourism and education sectors.
History tells us that most commodity/terms of trade booms typically see a rebalancing economy as the exchange rate falls and stimulates other sectors of the economy. The major positive for our economy was the good employment numbers that were released mid-January with our unemployment rate remaining at 5.8% and more full-time jobs created than expected. Looking at Chart 2 below the quarterly numbers to December 2015 show that the trend of mining job losses coming to an end and employment picking up.
Unemployment Boosted by Non-Mining Jobs Growth
Source : Deutsche Bank
Though most of the press focusses on the price index (excluding dividends) owning shares also means that you receive a dividend stream that is an important contributor to total returns. It is also worth noting that in terms of growth in the market the chart below shows that most of most brokers are forecasting growth in our share market for 2016. The Institutional Brokers Estimate System (IBES) consensus numbers are also shown below.
Whilst markets will remain volatile while they come to grips with this new 2016 “wall of worry” the early results of the February reporting season are positive with Commonwealth Bank, Boral and Stockland all producing solid results, a good early indicator that the Australian economy is on track to continue the post-mining transition.