The year so far

Volatility has been the key theme for the year so far, with the US sharemarket reaching record highs in January followed by a sharp decline.

On the positive front, corporate tax cuts in the US, strong corporate profit results and solid global growth forecasts have buoyed markets. However, this was contrasted with fears over inflation and the likelihood of continued interest rate rises in the US and the potential for these to dampen their economy. These fears have been compounded by President Trump’s talk of a trade war with China, and military involvement in Syria.

The Australian market has been fairly steady, with weakness in the financial sector over the banking inquiry and likely lending standards reforms. Commodity prices are being held back by the trade war concerns.

Outlook for 2018

The factors that contributed to growth in 2017 look set to continue, namely continued global growth, low inflation (excluding the US), and supportive monetary policy.

Volatility also looks set to continue – with the market showing extreme reactions to President Trump’s announcements. For instance, the dramatic China trade war announcements look likely to be resolved without too much disruption, but throughout the process there has been a great deal of market movement.

Australia’s sluggish retail spending is not surprising given our slow wages growth and high levels of household debt. This however has the potential to improve, with strong employment numbers and infrastructure spending being positive factors. With the US Federal Reserve likely to continue raising interest rates, but Australia unlikely (soon) to do so, there is downward pressure on the Australian dollar.

So on the whole, we feel it’s a good time to be investing in growth markets, but as always this comes with volatility. The likelihood of global recession remains low, interest rates are generally favourable, and earnings growth in most economies looks positive. Key risks continue to be political, along with US inflation and interest rates, and domestically the risks around our housing cycle and consumer spending. 

Economic indicators – 29 March 2018	1 year % excluding dividends
Australia: ASX 200	-1.9
Japan: Topix	10.5
China: CSI 300	12.4
UK: FTSE 100	-4.3
US: S&P 500	11.8
Australia: Current at 29 March 2018
AUD/USD	0.77
Official interest rates	1.5
Aus 10-year bond yield	2.6

 

Published : 16 Apr 2018