2016 on the Markets

If January on the ASX is anything to go by, it is that our local market is in the zone of some serious volatility at present. The real question is, will it be a prelude to a recession for Australia in 2016?

The Australian Stock Exchange ASX 200 index opened the year above 5000 pts at 5200. At the time of writing this article, it is trading just shy of 4900pts. Weighed down heavily by the underperformance of mining market heavyweights BHP Billiton and Rio Tinto, the market has followed an inconsistent spell of volatility for much of the new year. Weakening demand from China has hammered resource stocks, and as if systemic demand issues were not enough for the ailing giants, the price of oil has tumbled due to a surge in supply lead by the United States and a resilient OPEC.

Banking and Financial Services stocks have thus far maintained shelter from the cataclysmic reduction in the mining sector’s fortunes, with all of the big four remaining at a consistent price to round out the last six months in the black.

Low oil prices have yielded their advantage to many transport and infrastructure concentrated companies. Qantas has enjoyed not only one of if not the most successful corporate turnarounds in history but has also endeavoured to improve its product in response, innovating its cabins and launching new routes around the world. That being said, while the low Aussie dollar leaves little to shout about for Aussie’s heading overseas, data from the Department of Immigration and Border Protection shows the market is not as deterred as you’d expect by the prospects of expensive travel costs

The recent collapse of retail electronics company Dick Smith has demonstrated that not only is corporate greed alive and well, but that these days crooks wear a suit and tie and work for Private Equity. It takes skill and gall to turn a $10 million investment into a $500 million return, especially when the destruction of a brand and employee’s livelihoods is the result. While it’s business model has been under threat for months it was a carefully calculated cut and gut heist that will go down in the history books.

This volatile market setting and bearish outlook for the lucky country means that the RBA is unlikely to be raising rates anytime soon. Ongoing signs of weakness in the Australian Economy such as sluggish GDP growth, inflation rates and balance of payments means that the RBA will not change its position. To avoid a liquidity trap and indeed maintain its course away from a recession the powers that be must do just that. So sit down and buckle up because whatever the outcome, 2016 is going to be a bumpy ride on the markets.