March Market Commentary

March Market Commentary

Monthly Economic & Investment Market Commentary

March 2012

Last month’s report focused on the United States and Europe, and as promised our discussion this month will focus on China, India and the Emerging Markets, and then finish with an update on the Australian economy. There have been some significant data releases in just the last few days, not the least of which was the Chinese GDP figure for the first quarter of 2012, and whilst like last month we are a little behind on the normal publication schedule, we do get to include our thoughts on these important developments.

Before we delve into the regional discussion, we note the International Monetary Fund has just released their World Economic Outlook, including improved expectations for the global economy which has provided a catalyst for equity markets around the world. The report is titled “Growth Resuming, Dangers Remain” and gives credit for turning around the crisis to the policy response in Europe including efforts to deal with debt and deficits and to the liquidity provided by the European Central Bank. More sobering is the following paragraph:

With the passing of the crisis, and some good news about the US economy, some optimism has returned. It should remain tempered. Even absent another European crisis, most advanced economies still face major brakes on growth. And the risk of another crisis is still very much present and could well affect both advanced and emerging economies.(1)

As if that weren’t enough with which to contend, we need also to consider the potential implications of the current geopolitical tensions in both the Middle East, between Israel, the West collectively and Iran’s nuclear ambitions, as well as the North Koreans launching missiles to get better weather forecasts.

The IMF Report highlights the significant gap between the expected growth rate of 1.5% in the advanced economies, and 5.75% in 2012 for the emerging and developing economies, increasing to 6% for 2013.

The accompanying chart gives a compelling view of the different outlook for the two broad groupings of the global economy.



Last week the Chinese reported that their economy grew at 8.1% in the first quarter of 2012, and as this was below expectations of 8.4%, it was seized upon by some of the people that have been incorrectly forecasting a hard landing for the Chinese economy for the last several years. Of course we do not share these views, but do note that the policy efforts of the Chinese Government have been directed to achieving just such an outcome. We have often referred to the explicitly stated objective of the Chinese to realign their economy towards domestic consumption, whilst concurrently reducing their reliance on exporting to consumers in the developed world. The Lowy Institute picks up on this theme:

Remarkably, given China’s reputation for growing by sucking in demand from the rest of the world, the 2011 figure [9.2% GDP Growth for 2011] was achieved without any help from the external sector: the growth in imports was higher than the growth in exports.
The long-awaited re-balancing seems to be underway.(2)

To round off our discussion, the Economist made an interesting rebuttal to one of the most common criticisms levelled at the Chinese, that being they have overinvested in infrastructure, most often measured by the percentage of fixed asset investment. The article(3) references HSBC’s Chief China Economist who refers to China’s total capital stock – the value of all past investment, adjusted for depreciation. On a per capita basis the estimate is that China’s capital stock is just 8% of the equivalent figure for the United States and 17% of the figure for South Korea.

We shouldn’t expect that the transition of the Chinese economy will be without incident. We do however believe that the likelihood of the Chinese successfully implementing policies to encourage domestic consumption to increase from less than 50% contribution to GDP, and towards the more standard two thirds, is much higher than the likelihood of the Europeans and Americans dealing with their problems.


Latest revisions to the expectations for Indian GDP Growth have come in at 6.9% (IMF), and this week the Indian central Bank has cut rates by 0.50%, this was greater than the expected 0.25% and significantly represents the first decrease in interest rates following 13 consecutive rate hikes over the last few years. Whilst fighting inflation was the clear objective of the rate hikes, the fact that inflation is expected to stay above the bank’s target range of 4.0% to 4.5% throughout 2012 probably means there is little scope for further easing. One potential reason for the cut seems to be that there may be a similar issue in India as in Australia, with banks moving interest rates out of step with the Central Bank.

Two of the most significant potential problems to which India remains susceptible are indeed inflation in food and energy prices. On the latter, the Indians import 75% to 80% of their oil needs, and will therefore be impacted by any of the potential shocks that may emanate from the Middle East, to the extent that triggers a significantly higher price. There is enormous latent potential in the Indian economy and the 1.2 billion Indian people, but capital investment is needed to alleviate bottlenecks in the economy and to enable growth without triggering inflation.

We have only a small exposure to Indian companies within the Emerging Markets ETF in International Equities; however we will remain vigilant for signals that a larger exposure is warranted.


At home we are optimistic about the outlook for the Australian economy, not by virtue of any great faith in either side of politics, but because we simply are not confronted by the magnitude of problems that European and American leaders will need to deal with in the next several years. We also restate our view that we have a much better capacity to confront any such problems that may eventuate.

The first and most obvious response would be from our Reserve Bank which has official interest rates at 4.25%, and indeed a cut of at least 0.25% is widely anticipated when the RBA meets in early May. The minutes from the March meeting of the Monetary Policy Meeting opened with this observation:

Members noted that the growth rate of the world economy was expected to be at a below-trend pace in 2012, with ongoing weakness in Europe and an easing in the pace of growth in China. However, growth in Australia’s major trading partners, weighted by shares of merchandise exports from Australia, was expected to be around average in 2012.(5)

Enhancing the effectiveness of this first response to any slowdown is the structure of our mortgage market, where a significant majority of households borrow on variable rates, and as a result typically benefit from most if not all of any such rate cut relatively quickly. We should acknowledge though that there is certainly more independence being shown by the banks, rather than simply moving in lockstep with the RBA Cash Rate. We have significant exposure to the Australian banks in our portfolios, via the Financials ETF and Income Securities, and as investors we see such moves by the banks to protect their margins as prudent.

We finish with a comment on the current debate about the imperative of delivering a budget surplus for the 2012/13 financial year. On the one hand we have the current Government that many see as having politically painted themselves into a corner, such that come hell or high water (or perhaps just adjustments across the forward estimates) will deliver that promised surplus. Detractors say the significant contraction in government spending will send the economy into recession. Not surprisingly the Government defends their view as being a policy imperative, and more recently on the grounds that the RBA will have more scope to cut interest rates.

Our position is based on our long term views and we expect that the budget will come back to surplus, whether it is next year or the year after, or whether it is a $1 billion surplus or a $1 billion deficit does not have a great impact on our ten year forecasts. We will of course review and adjust our assumptions and forecasts at our monthly meetings, and as always share our latest views with you.


Below we have index positions as at the middle of April for the three indices tracking Australian Equities, International Equities and Listed Property, partly due to the delay in publishing the March commentary, and also to reflect the rally in recent days. The relative valuations between asset classes remains largely unchanged, Australian Equities has moved marginally higher but remains well within our Cheap range, whilst Listed Property has been into Fully Priced, but just slipped back to the upper end of Fair Value. At our most recent meeting we have retained our active asset allocation positions.


1. IMF, World Economic Outlook. Growth Resuming, Dangers Remain. Apr-12.
2. Stephen Grenville, China Still Has Plenty of Room to Grow. Lowy Interpreter. 17-Apr-12.
3. Capital Controversy: China’s ‘overinvestment’ problem may be greatly overstated. The Economist. 14-Apr-12
4. Kiron Sarkar, Indian Central Bank cuts rates by more than expected. The Big picture. 17-Apr-12.
5. Minutes of the Monetary Policy Meeting of the Reserve Bank Board. 3-Apr-12.

Reuben Zelwer



About Reuben Zelwer


Reuben Zelwer established Adapt Wealth Management in 2011 to help time poor clients achieve financial freedom. For over 15 years, Reuben has helped professionals, executives, business owner and those approaching retirement make the most of their circumstances by making good financial decisions. Reuben’s professional practice is complemented by substantial voluntary work, which has included setting up financial literacy and savings programs in the local community.