Money Matters Monday 9th April 2018
Tailwinds Still Beat Headwinds
Global share markets have lost their confidence since January with headwinds reappearing. Volatility has returned. Investors are swinging from enthusiastic buying to scared selling day to day. How do long term investors chart a course?
There have been several serious concerns. The first was threats by North Korea to launch nuclear bombs. Initially we thought the North Korean leader was mad, but perhaps not. Maybe his actions are for internal consumption only and he won’t do anything dangerous.
Perhaps he just wants to be viewed as an equal of the US able to meet and negotiate with the US President, so as to impress his people, keep them loyal and prevent them rebelling against his brutal regime. He also has a history of using such threats to blackmail other countries for financial support.
Interest rate concerns
Another fear is that interest rates will rise faster than previously anticipated. This story has been recycled regularly. Interest rates are rising slowly and monetary stimulus measures introduced after the global financial crisis are being wound back worldwide.
However central banks will only raise interest rates as needed to control inflation which remains low. Rates will only rise when economies can tolerate it without reversing.
The next concern is US President Trump’s trade war, or trade negotiation perhaps. We are yet to see what will happen. There is evidence Trump’s bark is worse than his bite. Maybe he too is simply doing what he has to, to keep his voters loyal.
Perhaps they believe that if Trump slaps heavy tariffs on cheap Chinese imports the US factories that have closed will quickly reopen and re-employ them.
The most recent worry is possible tighter regulation of the global technology giants in the wake of data privacy breaches. They may also be taxed more heavily by the countries where they operate. This will affect those companies but not the economy.
Considering the positives
Major US fund manager Russell Investments said recently the headwinds have increased but the tailwinds are still much stronger. Borrowing costs are still very low. They will rise but only gradually. Russell Investments think the US could have a slowdown in 2020 bringing rates back down again.
The US economy is growing strongly, Europe is doing quite well, China is continuing to perform very strongly, Japan is improving and Asia is also growing. Demand for Australian goods from China and Asia is strong due to our perceived quality. Mineral and rural commodity prices are mostly good.
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