Looking at where various market economies are heading for the balance of 2017 and into 2018, we offer the following commentary.
Reserve Bank (RBA) Governor Lowe recently highlighted the issues facing Australia. Low wages growth, erratic consumer spending and the housing markets in Sydney and Melbourne. He reiterated his warning that the appreciation in the Australian dollar is weighing on inflation and growth and that a lower Australian dollar would be “helpful”. While Lowe indicated that the next move in rates is more likely to be up than down, he also indicated that this won’t be for some time.
The view remains that rates will remain on hold ahead of a rate hike late next year, but if the Australian dollar continues to rise, a rate rise may be even further delayed and the next move could turn out to be a cut.
In the markets, Australian enquiries are still seen as expensive.
As is mentioned below, improving global growth and profits along with still easy monetary policy has buoyed world share markets with their shares continuing to outperform Australian shares.
The view especially is the Australian banks remain overvalued, with key risks they face on the horizon such as:
- Increased capital requirements
- Macro prudential policy aimed at limiting lending to property investors
- Growing bad and doubtful debts
- The domestic economy still remains under pressure following the mining boom
- Consumers well leveraged
- Threat of a slowing property market in general
Caution also extends to the resources sector, especially with these stocks having rallied strongly on the recent commodity price increase.
With Financials and Resources making up such a significant portion of the domestic market (albeit the latter now represents much less than it once did), prudent investors should diversify amongst all other asset classes.
From the U.S. side the economy looks healthy, as consumers are spending and companies increase investment after a long period of ‘sitting tight’. A key issue is when the Federal Reserve continues with its next interest rate increase. There have been three rises in the last eight months, with the rate now at 1.25%. These moves underpin a vote of confidence in this slow growing but durable economy.
The US dollar has been weak in recent months, with this caused by a couple of factors. Firstly, the European Central Bank (ECB) has been giving signals of a change in their monetary policy (reduce/stop bond purchases) due to a strengthening Eurozone economy, so a rise in the Euro against the US$. Additionally, the dollar’s depreciation factors in the problems facing the Trump administration in advancing its Legislative agenda. Market participants are low in confidence on the chances of his Legislative success with his announced measures that it was anticipated would significantly boost US economic growth.
As stated, while the ECB continues it accommodative monetary policy at present, changes look likely. This may be 2018, where it is expected to slow its monetary stimulus. A key factor to watch is if policymakers can be more confident that inflation will return and remain close to their target of around 2%.
The July International Monetary Fund forecast update saw a revision upward for the Eurozone to 3.6% next year and 3.5% currently. This was a result of strength in European businesses, and the political concerns of far-right candidates in the domestic elections (Holland and France so far) have failed to eventuate. Unemployment also reached an 8 year low at 9.1%. That’s not an attractive number by Australian standards, but it’s on the way down from where it was.
Japan and Asia.
The relatively strong recent performance of Japan and China, Asia’s two largest economies, underlines the more positive picture in large parts of the global economy so far in 2017, even if the overall level of growth is steady rather than elevated. We have seen significant increases in share markets and company outlooks in the Asian region. Interestingly though, India remains the region’s fastest-growing major economy, along with the region’s emerging economies, particular Thailand and Malaysia.
Japan’s economy expanded at the fastest pace for more than two years with domestic spending accelerating as the country prepares for the 2020 Olympics and ow levels of unemployment encouraged businesses to invest. However, they still have an issue with the demographic and their birth rate. The birth rate has fallen below the replacement level. 12.5 percent of the population is 75 years old and above, 25.9 percent is aged 65 or above and 33 percent of the population is above 60. 70% of the population over the age of 60!
Interestingly, recent reports indicate that Asia’s emergence over the last decade has had a major impact on the global investment landscape. There has been a change in the investor base of Asian companies – caused by the rising wealth of individuals in the various countries who are investing money in their own equity markets,
This has thus seen a significant improvement in corporate governance standards as investors demand companies increase their standards with greater transparency and better capital allocation.
Paying dividends is a prime example of this.
Should you like more information on how this impacts your finances, please don’t hesitate to be in contact.
Sources: AMP Capital, Fidelity, Franklin Templeton, The Ecomomist, Morningstar.
This document contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider you financial situation and needs before making any decisions based on this information.