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Can investors defy global uncertainty?

Can investors defy global uncertainty?

A change of government, a slowdown in economic growth, a natural disaster, a global oil glut – there’s many factors that can affect an investment.

Volatility clouded global market performance at the start of this year, and despite some recovery, macroeconomic factors, elections and commodities demand continue to keep investors uncertain.

The Australian Bureau of Statistics (ABS) performance data for Australian industry sectors in the last financial year showed that property, agriculture and healthcare sectors dominated the profit margin league table in 2014-15.

The results may surprise investors, but are worthy of further consideration when poring over listed stocks on the ASX,” according to CommSec chief economist Craig James.

While resources companies might be feeling the heat in the current global economic environment, with benchmark oil and iron ore prices bouncing around this year, economy-wide sales rose by 1.5% in the March quarter – the biggest increase in six years, since the December quarter 2009.

And sales are up 2.2% over the year, according to the latest Business Indicators report from the ABS.

Companies are lifting sales, but prices remain restrained, capping revenues and profits,” said James, commenting on the ABS report.

“‘Disruption’ is hitting more and more companies – principally globalised competition (especially online) and new entrants into established industry sectors, causing a disruption to the status quo.”

A 4.7% fall in gross company profits in the March quarter was much larger than the flat outcome that analysts expected, according to Commonwealth Bank economists. “The previous figure was revised to a larger fall, from ‑2.8% to ‑3.6%, making the overall profits outcome a bit worse,” said CommBank’s Michael Workman in a note.

“The sectors recording profit falls in QI were: mining ‑9.6%, manufacturing ‑14.5%, utilities ‑5.6% and property and business services ‑6.4%. Gross profit rises occurred in construction 0.6%, wholesale trade 1.8%, retail trade 0.6%, accommodation and food services 3.8%, transport and storage 5.3% and other selected industries.

“The mining sector’s adjustment to significantly lower commodity prices continues to weaken the overall profits outcome. Although, the ex‑mining picture is also pretty weak, because it fell 3.1% in QI to be 3.3% lower over the past year,” Workman said.

Brexit: Stay or go?

While Australia adjusts to lower commodity prices and less reliance on the mining sector for growth and jobs, globally, there are several potential impacts for markets in the short term.

The UK will hold a ‘Remain/Leave’ referendum on its membership of the European Union (EU) on 23 June.

Overall, the referendum is likely to be shaped by two factors – the uncertainty around economic growth and jobs likely to favour the ‘Remain’ vote, and concerns around sovereignty and immigration to favour the ‘Leave’ vote. That's according to analysis from Colonial First State Global Asset Management in its ‘Brexit: What are the risks and potential impacts?’ report.

“Current polling suggests a narrow victory for ‘Remain’, but polls have been tight and there remains a significant proportion of undecided voters," the report notes.

"If the UK votes to ‘Leave’, they will enter into a two-year negotiation process with the EU to determine their post-exit arrangements on issues such as trade, regulation and immigration. The results of these negotiations will be key in determining the long-term outcome of a ‘Brexit’ and represent a major source of uncertainty for markets. 

“Along with the November 2016 US Presidential election, the UK referendum has the potential to add a political dimension to ongoing risks and volatility on global financial markets.”

The China factor

China has been an ongoing concern for markets since the initial yuan currency devaluation back in August 2015.

Demand for commodities and a slower pace of growth in the world’s second-biggest economy remain on the radar.

CommBank economist Wei Li forecast in a note that China’s housing market is expected to enter a cyclical downturn from Q4 2016. Housing construction is a major consumer of copper and steel, which requires iron ore.

“Housing price has risen by 13% over the past year at the national level, and by 28% in tier 1 cities. Concerns about housing market overheating are rising. Mortgage lending is set to slow in the remainder of 2016 after rising 79% YOY [year-on-year] in Q1," said Li.

“Our forecast of a forthcoming housing downturn in China should resemble those witnessed in 2008, 2010 and 2013, limiting gains in the iron ore price. This implies limited upside in Australia’s terms of trade, consistent with our AUD/USD forecast that the AUD remains in the low‑ to mid‑0.7000s to the middle of next year, with a downside risk.” 

Believe in the fundamentals

All these elements combined can leave investors wondering what to do when markets are volatile and global economies are dealing with uncertainty.

A change of government, a slowdown in economic growth, a natural disaster, a global oil glut – there’s many factors that can affect an investment.

Investors are scrambling in this uncertainty to make sense of what’s going on, and as a result are being distracted by the noise, according to Bennelong Australian Equity Partners investment director Julian Beaumont at a recent industry discussion.

“We’re conscious of the day-to-day volatility [of the equity markets],” said Beaumont. “The market’s all over the place and blue-chip stocks like BHP Billiton can be up or down 3% or 4% a day on very little [information] except for some data out of China or the US Federal Reserve.”

He said it was important to look at the underlying business fundamentals and highlighted sectors that dealt with services including tourism, education, specialised manufacturing and health care.

“The market is still rewarding improving fundamentals and so that’s where investors should be focused,” he said.

The ABS data backs plenty of variation in terms of the performance of companies listed on the ASX, and they are all affected in some way by the Australian economy.

Gaining diversity beyond the ASX

Investing in international shares can add diversification to a portfolio as foreign economies are affected by different factors.

Exchange traded funds (ETFs) provide exposure to whole sectors, countries or regions and can reduce the impact that individual companies have on your overall investment performance.

ETFs offer a relatively low-cost entry into markets that might otherwise be difficult to access and may provide diversity, transparency and liquidity that can assist in mitigating risk, particularly when markets are volatile.

“Investing has become a lot more about the macro picture,” said BetaShares managing director Alex Vynokur in an interview.

“Investors are seeing ETFs as alternatives or a complement to trading shares on the ASX. They make it easier to access important asset classes such as international shares (for example Nasdaq 100 ETF), currencies (for example USD ETF) and commodities (for example Gold Bullion ETF),” Vynokur said.

iShares director Jon Howi added that ETFs are increasingly becoming a core part of an investor’s portfolio, given current uncertainty and volatility in markets and global economies.

He forecasts that while current penetration in the Australian market is around 1%, it could swell, with penetration rates in Europe around 5% and as much as 10% in the US.

Globally there are around 5500 ETFs available, with around 135 on offer in Australia, Howie said in an interview.

“Investors are active in the investment decision and have access across the world,” Howie said. 

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples, including but not limited to Exchange Traded Funds given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia.