March Market Commentary

March Market Commentary

Over the past month we’ve seen positive movements in the Australian share market as well as in the developed international equities. Meanwhile, there have been downward shifts in emerging international markets along with listed property trusts.

The table below shows our long term (10 year) expected returns from four asset classes; Australian shares (represented by All Ordinaries index), international shares (S&P 500), Emerging Markets (represented by the FTSE Emerging Markets Index) and listed property (ASX 200 Property). The four valuation ranges, represented by the different colours, are determined by comparing the return we forecast, to a risk free rate of return (Term Deposit rate).


Political and Economic Commentary

Tensions are escalating on the Korean peninsula, and as we prepare this commentary the outcome from the posturing of Kim Jong Un is uncertain. Below we share with you Jonathan Pain’s recent commentary on the current situation.

“Over many years now, we have all learned to ignore the antics of the North Korean leadership and have largely dismissed them as irrelevant in the larger scheme of things. For decades what happened in Pyongyang had absolutely no bearing on anything of any consequence, and we ignored their interminable blustering.

I think this is about to change.

Briefly put, China has had enough [of the North Koreans] and will make the situation go away. If they don’t then we do have a serious problem. However, I just cannot see how the Chinese could conceivably want to see things escalate any further. Perhaps, and it’s just a thought, the Chinese have allowed the situation to deteriorate so that they then could be seen to be the white knight riding to the rescue. Stranger things have happened, and, in the Machiavellian world of geopolitical posturing, this actually might make sense. If Beijing was seen to be resolving this issue once and for all, then it would most certainly herald the coronation of China as a major power on the global stage. In this regard, the last thing China wants is for America to have even more reasons to set up camp in its backyard. Indeed, the North Koreans are providing the Americans with plenty of reasons to accelerate the so-called ‘Asia Pivot’ and expand their military presence in the Pacific.

Whichever way I look at this, China has a strong motive to defuse the situation quickly and I believe that they will.”1


Stephen Roach, now at Yale but formerly the Chairman of Morgan Stanley Asia and the firm’s Chief Economist, recently he gave an update2 from the China Development Forum held in Beijing in late March, which he wrote had “deepened my confidence that a major structural transformation is now at hand” encompassing continued urbanisation and a stronger social safety net, overseen by a new leadership team described as follows:

“The final – and possibly most important – insight that I took away from the Forum concerned the quality of China’s new leaders. From President Xi Jinping and Premier Le Keqiang on down, China’ new leadership team is quite sophisticated in terms of analytics, risk assessment, scenario modelling, and devising innovative solutions to tough problems. Moreover, under the organisational umbrella of the National Development and Reform Commission – the latter day version of the old central planning apparatus – China has marshalled considerable resources into the formulation of a comprehensive and well thought our economic strategy.”

Martin Wolf (Financial Times) refers3 to a paper released ahead of the above conference, which describes some of the changes in trajectory expected in coming years for key statistics in the Chinese economy. Fixed investment represented 49% of GDP in 2011 and is expected to fall to 42% of GDP in 2022, while the share of GDP accounted for by consumption is expected to increase from 48% to 56% over the same period.

There are of course risks to the Chinese successfully managing this transition which Wolf summarises to three key areas.

  1. A steeper than expected decline in the rate of economic growth will mean much lower investment levels, upon which the economy is still reliant.
  2. The financial system would need to cope with a likely increase in bad debts in credit-driven investments such as real estate.
  3. For domestic consumption to increase there needs to be both a decline in the rate of private savings, which would be assisted by a stronger social safety net, but also a shift in income away from the corporate sector to the household sector.

A difficult task no doubt, but one that must surely stand a better chance of being completed by a leadership that is stable and has, as Stephen Roach put it, “a comprehensive and well thought out economic strategy”. Historical examples are useful in illustrating the potential of the Chinese economy, and cause for an optimistic outlook for China. Data cited in the FT article show that GDP per capita in China is equivalent to where Japan was in 1966 and where South Korea was in 1988, and currently represents just over a fifth of the same measure in the United States. While there will doubtless be some ups and downs in the growth trajectory over the next ten years and beyond, the potential remains clear.


Analysis of the situation in Europe has been of the potential impact of the decisions made to bailout the Cypriot banking system, and specifically the chance that Cyprus may depart the common currency. In effect, the capital controls and punitive measures contained in the bailout terms mean that a Euro in a Cypriot Bank is already no longer equivalent to a Euro held elsewhere. In a moment of unexpected candor the Dutch Finance Minister Jeroen Dijsselbloem, stated that ‘uninsured deposit holders’ would also be asked to make a contribution to the recapitalisation of a bank that was in trouble. In effect he was saying that the plan to impose a ‘haircut’ on depositors in Cypriot banks would serve as a template for any future rescue plans elsewhere.

Within hours, and presumably after having received advice from more seasoned politicians, Mr Djisselboem came out with the following contradictory statement: “Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday. Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.”

Japan is pushing ahead with its aggressive plans to use extraordinary monetary policy to stimulate their economy which has been struggling to grow for more than two decades. The Japanese are targeting 2% inflation by doing what many other developed economies have done, which is to have the central bank expand its balance sheet and undertake purchases of government bonds and other assets. A moderate rate of inflation and low interest rates will help the Japanese in managing their debt, and the effect of lowering their exchange rate will help the competitiveness of Japanese companies.

The Japanese will combine the policies mentioned above with others designed to foster growth in their economy, particularly to improve productivity and to increase labour force participation, especially by women. Economist Joseph Stiglitz4 is optimistic:

the country benefits from strong institutions, has a well-educated labour force with superb technical skills and design sensibilities, and is located in the world’s most (only?) dynamic region.


1. Jonathan Pain, Climbing the Mother of all Walls. The Pain Report. 5-Apr-13.

2. Stephen Roach, China on the Move. Project Syndicate. 29-Mar-13.

3. Martin Wolf, Ten years of turbulence could topple Chinese. Financial Times. 3-Apr-13.

4. Joseph Stiglitz, The Promise of Abenomics. Project Syndicate. 5-Apr-13.

DISCLAIMER: The information in this commentary has been provided for publication by Implemented Portfolios (ABN 36 141 881 147. AFSL Number 345143). The information has not been verified by Implemented Portfolios or Adapt Wealth Management Pty Ltd (ABN 76 821 231 362 Corporate Authorised Representative of CHPW Financial Pty Ltd AFSL 280201) but is believed to have come from reliable sources as noted in the acknowledgements. No Liability is accepted by Implemented Portfolios, or Adapt Wealth Management Pty Ltd, its Directors, officers, employees or contractors for any inaccurate or incorrect information. The information is a broad commentary and there is no intention that a client should act on the information without seeking professional assistance from their own advisers (legal, tax, accounting, financial planning) for suitability in respect of their unique circumstances.

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.