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Phillip Gray is the editorial and communications manager and Donal Curtin is a consulting economist with Morningstar.
Outlook for investment markets
Growth assets had a resurgence over the past month, due mainly to increased optimism that the European Central Bank would weigh in more effectively to address the Eurozone's debt problems. Bond yields correspondingly rose as investors felt less need to hold 'safe haven' assets. While there are some grounds for optimism about further gains for growth assets, the outlook remains heavily and unpredictably dependent on political outcomes in the Eurozone (to address debt, fiscal, and growth problems), in the United States (to resolve fiscal gridlock), and in China (to continue to deliver high rates of growth without sparking consumer price and property inflation).
Australian cash and fixed interest – review
Short-term interest rates fell over the past month, 90-day bank bills down from 3.75 to 3.55 percent. This reflected the fact that the Reserve Bank of Australia cut the cash rate again on 5 June from 3.75 to 3.50 percent. Longer-term rates followed the global pattern: high levels of investor anxiety at first pushed 'safe haven' government bond yields down by late July, 10-year Commonwealth bond yields reaching a low point of 2.70 percent, but more recently improved confidence has seen yields move up, the 10-year yield now close to 3.40 percent. Other long-term rates such as the three-, five-, and 10-year swap rates have followed suit. The $A was a beneficiary of improved investor sentiment. It had been as low as 97 US cents in early June when investors had been most rattled, but recovered in more recent months and was trading around the US$1.05 mark in late August. The $A gained 0.50 percent in trade-weighted terms over the past month, and was up a substantial 7.40 percent on its weak levels of early June.
Australian cash and fixed interest – outlook
In its August Monetary Policy Statement, the Reserve Bank stated that "with a more subdued international outlook, inflation expected to be consistent with the target and growth of the Australian economy close to trend, the stance of monetary policy – which had resulted in borrowing rates a little below average – remained appropriate". No change for now, in short, and the Bank also gave no hint about what way it might move if it were to bestir itself. The markets have their own view, and expect between one and two 0.25 percent interest rate cuts over the next year.
What happens to local bond yields is inextricably bound up with the largely unforecastable state of global investor sentiment. Further improvements in optimism could see yields continue to rise, while further outbreaks of nerves would see them relapse to earlier low levels. At the moment, forecasters' best guess appears to be that globally, affairs will continue to improve and yields will continue to rise. The latest forecasts from National Australia Bank and Westpac, for example, have the 10-year yield rising to 3.70 - 4.0 percent in a year's time, in both cases predicated on a gradual rise in the US 10-year yield to 2.50 percent.
The same is true of the outlook for the $A. While there is no strong consensus, forecasters for the most part reckon that a climate of improved investor sentiment will enable the $A to stay above parity with the $US: three of the big four banks have the $A in the US$1.01 -1.04 area in a year's time (ANZ is a bit less optimistic at 98 cents).
Australian and international property – review
The Australian listed property sector had another decent month with a modest capital gain of 0.90 percent from the S&P/ASX200 A-REIT Index and a total return including dividends of 2.10 percent. The sector continued to deliver relatively low volatility, slow and steady gains.