Although it’s unlikely that we’ve seen the worst in sharemarkets, we do expect them to improve by the end of the year. In this article we look at the drivers behind market performance as well as the RBA’s likely move to cut rates in the coming months, and the economic impacts of the oil price drop. 

Outlook on the RBA’s decision to hold interest rates

The culmination of global economic turmoil and reasonably solid economic data within Australia has prompted the Reserve Bank of Australia (RBA) to leave interest rates on hold following the first meeting for 2016. We expect the RBA to cut rates by approximately 0.25% in the coming months from its current position of 2%, providing some further help for the Australian economy. 

How is the plunging oil price affecting our economy?

There’s good news and bad news to come from the plunging oil price, which has come down by 70-80% in the past couple of years. The bad news for Australia is that we’re a net energy exporter and therefore a lot of our gas contracts will now export at much lower prices – there is also a flow-on effect to the Federal Government in terms of reduced tax revenues as a result. The good news; businesses and households that rely on oil and petrol as an input are seeing big savings. For instance, the average Australian household is saving roughly $700 a year on petrol. 

Have we seen the worst in markets?

History discredits the saying ‘As goes January, so goes the year’ with only a 30-40% chance that a poor January sharemarket performance will precede a poor year as a whole. Given current concern that global growth may linger for a while and that it will take a while for central banks to spring into action, it’s too early to say that we’ve already reached the bottom for shares. We are expecting more volatility in the short-term however, I see shares moving higher by year-end. 

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About the Author:

Shane Oliver 
Head of Investment Strategy and Chief Economist, AMP Capital 

Dr Shane Oliver, Chief Economist and Head of Investment Strategy at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.