In last half’s outlook, we noted that ‘an astounding 90%+ of the industrialised world now boast interest rates at or near zero percent.’ This half we take it one step further by noting that 17 countries now boast official interest rates that are negative! We really are living in extraordinary times and it is easy to become desensitised by just how unique this period is. To repeat our commentary from last half : ‘the reality is that much of the play book has yet to be written. No prior period has witnessed the combined impact of interest rates and quantitative easing of the scale and extent to that which currently pervades our markets. There are no analogues. There are times of ‘partial’ similarity such as the currency wars that occurred during the period intervening the great wars. But no period has evidenced the combined and coordinated central bank machinations of this time.’

The issue as we see it now, is that despite an unprecedented level of coordinated intervention, the central banks globally have only really succeeded in ‘kicking the can down the road’. They have largely failed to create sustainable economic growth, improve credit quality, spur inflation and importantly increase sentiment and confidence.

Moving forward we see four (4) key macro risks:

  1. The US equity market has rolled over technically after having rallied solidly from around 7,000 in early 2009 to an all-time high of 18,351 in mid-2015. This reflects the clear change in investor sentiment and confidence.
  2. Debt markets are showing signs of stress, characterised by rising credit default swaps (CDS) and heightened volatility.
  3. Chinese Debt has increased from 121% of GDP in 2000 to 290%+ in 2015, a dramatic dollar rise from $US2.1 trillion to US$30 trillion (McKinsey Global Institute).
  4. Confidence in the ability of the central banks to resolve this crisis is waning.

    And it is this fourth risk which has us most cautious, as it indicates that the timing may be sooner rather than later. To date, investors have been prepared to believe that central banks would be capable of managing the great credit deflation and orchestrate a return to growth and inflation. However, if investors genuinely lose confidence in the ability of the Central Banks to manage this crisis, then it will become self-fulfilling and self-perpetuating.

    We accordingly have maintained an overweight cash position and where possible are focussing on short duration opportunities with imminent ‘triggers’.


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