Global share markets made further gains in May with investors encouraged by a series of improving US economic data and news that the European Central Bank had lowered interest rates in an effort to boost growth in the euro-zone. However, there was plenty of volatility throughout the month; driven in large part by speculation the US Federal Reserve (Fed) will wind back its 'quantitative easing', or stimulus, program sooner than anticipated. Some weaker-than-expected Chinese economic data also caused some uncertainty.
Here in Australia, the share market fell sharply amid renewed concerns over China's growth prospects, speculation improving US economic data will prompt the US central bank to reduce its stimulus efforts and a volatile Australian dollar (AUD). Limiting the loss was the Reserve Bank of Australia's (RBA)'s decision to cut interest rates early in the month.
The RBA lowered the official cash rate from 3.00% to just 2.75% following its early May board meeting - the lowest level in the bank's 53-year history. The decision comes as investment in the dominant mining sector continues to slow while activity within the non-mining sectors is yet to gain any real traction. A still-high AUD and relatively low inflation also contributed to the bank's decision. Importantly, Australian interest rates remain relatively high compared to most other developed nations, giving the RBA plenty of room to move should the domestic growth outlook deteriorate.
The AUD fell sharply in May on the back of a resurgent US dollar, weaker commodity prices, the RBA's rate cut decision and a series of softer Chinese economic data. Speculation the Fed may wind back its quantitative easing program sooner than expected also weighed. The AUD closed the month 5.6% lower, as measured by the Australian Trade-Weighted Index.
Markets look set to continue cycling between pessimism and optimism throughout the remainder of 2013. Whilst we expect the US economy to expand further this year, growth is likely to be much more moderate and this may lead to periodic bouts of uncertainty. The euro-zone will likely remain intact, though more work still needs to be done if the region is to get back on its feet any time soon. And whilst the Chinese economy may be stabilising, the growth outlook for 2013 and beyond nonetheless remains uncertain.
Importantly, share markets remain relatively good value and this should bode well for investors with a long-term investment horizon.