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As we near the end of the first quarter of 2016 (yes already!) James Taylor shares his professional overview of current economic conditions:

Global Share markets have started the year in a tumultuous fashion, with the Australian market down nearly 8% to the end of Feb and many Asian markets faring worse. Whilst European markets have also struggled, it is the US that has been resilient. 

Concerns around China, slowing global growth, deflation, tumbling oil prices and interest rates have all contributed to the sell off, and for while, panic set in

Markets seem to have calmed somewhat upon the realisation that nothing has really changed.  The US has continued its steady economic growth and low unemployment, despite interest rates increasing in December.  China does not seem to be heading for a hard landing, and oil prices appear to have found a bottom and indeed have risen steadily over recent weeks.  Slowing global growth and deflation still remain a concern of ours, as does the advent of negative interest rates in many countries.

Financial Stocks locally bore the brunt of selling, with the big banks particularly hard hit.  BHP and oil producers were not spared either.  It’s easy to see why our market, being heavily reliant on financials and resources, has had a tough start to the year. The reporting season has just finished and in general the results were better than expected.  Banks continued to make strong profits with encouraging outlooks, and the general consensus is that we are at or near the trough with resources.

Australia has just posted a surprising increase in GDP in the last quarter of 2015 to come in at 3% for the year, 0.25% above expectations.  Recent increases in iron ore prices and oil also bode well for future revenues as does the continuing strength of property and other related industries.   It is an interesting time for interest rates, with local banks raising rates on investment lending after APRA imposed limits and capital raisings. The expectation is that banks will need to raise more capital, which may see investment rates increase further. 

Property Bubble articles have sparked fierce debate both for and against. 

Irrespective of your view, it's worth understanding your exposure to this asset class and the ramifications to your financial position should the housing market fall

Australians collectively are heavily exposed to, indebted to and reliant on property.  It makes up the majority of our personal wealth and debt, and is a significant income earner for the government. 

Equity Markets cautiousness is high, and the outlook uncertain and there is still no clear direction as to the likely performance over the near/medium term.  It is at times like these that we should seek to minimise our level of risk and the best way to do this is to diversify!  Diversification is all about maintaining exposure to a variety of asset classes and not speculating about the performance of a single asset class.  Diversification has been shown to not only reduce the risk you hold in your portfolio, but also increase returns over the longer term.  We should all be constantly reviewing our asset allocation and assessing whether the risk we are taking is consistent with our investment objectives.