Movements in the Australian share market affect not only share investors but also our super fund returns. The market has continued to display nervousness recently. Investors are staying close to the exits.
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Since the All Ordinaries Index reached 5900 points in April and May it has been edging lower without much justification. Companies reported healthy profit increases for the December half year on average. Since then there has been little news to change the outlook.
The June full year results to be reported in August are keenly awaited. Meanwhile, the US share market is providing strong leadership. It hit a new all-time high again recently and remains close to that level.
North Korea is the latest concern. Its actions have caused investors to reduce exposure, pushing markets down. North Korea has no economic influence on our companies’ profits or share prices but if it did manage to drop a bomb anywhere on land that would cause a serious market fall.
The threat of US President Trump’s protectionist policies continues to recede. His experienced, senior advisers are ensuring there will be no Mexican Wall and no 45 per cent import duties on Chinese goods.
A more serious concern is recent talk of reduced monetary stimulus and interest rate increases by central banks. Higher interest rates reduce company profits and make share investments look less attractive.
European Central Bank Chair Mario Draghi said that reflationary forces are in play. European business activity is improving and confidence is strong. Inflation is likely to rise. Bank of England Governor Mark Carney says removal of monetary stimulus is likely to become necessary.
The US Federal Reserve has already removed its stimulus measures and begun raising rates. Chair Janet Yellen says that is likely to continue. The rate hike talk has caused a rise in government bond yields and a small decline in share prices.
However, the moves by central banks to reduce stimulus and foreshadow higher rates are simply a reaction to improving economies, in proportion to the degree of improvement. Company sales and profits have been improving in most countries and leading economic indicators are strengthening.
Inflation is a key reason to raise interest rates, but it remains very low in all major economies. It provides no reason to raise rates and will allow them to stay low for longer.
Future moves to reduce stimulus and raise rates will be gradual and appropriate to the developing circumstances. We are a long way from the high rates and tight monetary policy that usually precede market slumps.
