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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

The outlook for growth assets remains broadly positive, and investor confidence has been boosted by further quantitative easing by the US Federal Reserve and moves by the European Central Bank. Interest rates are likely to remain very low everywhere for quite some time yet. The Australian economy should still put in a reasonable performance by developed economy standards, but the sharemarket has been priced on the good times continuing to roll at the same strong pace as before, which is now looking increasingly questionable.

Australian Cash & Fixed Interest - Review

Australian short-term interest rates were steady over the September quarter, 90-day bank bill yields at 3.50 percent. The Reserve Bank of Australia cut the cash rate by 0.25 percent to 3.25 percent from 3 October, and other short-term rates followed suit, the 90-day yield 3.20 percent at the time of writing. 10-year Commonwealth bond yields have continued to track overseas government bond markets closely. Corporate bond yields have been lower. The $A rose from around US$1.019 to $1.046 over the past quarter, mostly because of the global weakness in the $US. The $A also gained a modest 0.50 percent in overall trade-weighted value.

Australian Cash & Fixed Interest - Outlook

The futures markets are currently expecting 90-day bank bills to be trading at 2.60 percent by the middle of next year. This would suggest two more 0.25 percent cuts by the Reserve Bank to the cash rate. Australian bond yields are likely to continue to take their cue from global bond markets. With yields overseas now expected to remain low for an even more protracted period, local yields are also likely to stay around current levels. While not especially attractive, they can function as helpful portfolio insurance against further economic uncertainties.

The $A remains uncomfortably high from the perspective of the export, tourism, and a number of other sectors. The $A has remained higher than might have been expected given the decline in export prices and the softer global outlook. However, there does not seem to be any catalyst on the horizon that would weaken the $A. If anything, improved international investor sentiment could see further buying of the $A, which tends to rise when investors are less worried about the global economic outlook.