Having just emerged from reporting seasons in Australia and New Zealand, and with a slew of economic data from the US and China also behind us, two strong investment themes are likely to develop over the next three months.

First, the US is recovering. Despite some doubts as to the robustness of the US data, what we have seen is consistently positive trends since late last year. Key here has been the prolonged improvement in employment, with private payrolls surprising on the upside over the last four months. Employment has been particularly strong in manufacturing, where a lower USD has encouraged corporates to return from higher currency regions in Europe and Asia. This has seen a significant improvement in consumer confidence and, in turn, some traction in the housing market. Arguably, the US is on the cusp of a self-sustaining recovery, which would be a partial panacea for the global economy.

This is important, because at the same time, China is softening. Hard data around cement production, steel production, and construction shows an economy that is slowing; this has implications for commodity prices in both Australia and New Zealand. It is likely that hard commodities will see more pressure than soft commodities, and it is this expectation that has seen the Australian stock market underperform regional peers. Until we see some substantial easing in Chinese policy, and the curbing of strict property controls, this China concern is likely to weigh on Australian mining stocks in the near term.

Third, Australia is seeing tight monetary conditions, as employment growth flat lines, the Reserve Bank of Australia (RBA) maintains rates while banks lift them, and consumer confidence returns to the depths it occupied before the RBA cut in December last year. Australian housing has held up well so far, but the facts of a slowing China and soft local consumer pose risks to this. The RBA will need to cut, and aggressively, to maintain momentum, and it is to be hoped that those cuts will come sooner than later.

Marc Whittaker