We are of the view that the nine-year equity bull market is not yet over with global stocks posting modest gains amid healthy corporate earnings reports and improving outlooks. The momentum of the world’s three main economies (US, China and Europe) is positive, with growth lifting all nations through accelerating trade volumes.
Recently, the election-weakened UK government is facing imminent and difficult Brexit negotiations, US President Trump coming under sustained investigative pressure from Congressional committees, and deterioration in relations with nuclear renegade states such as North Korea and Iran, create an environment in which markets could prove more vulnerable to negative news shocks.
In late July, the Federal Reserve kept interest rates unchanged and said it expected to start winding down its massive holdings of bonds "relatively soon" in a sign of confidence in the US economy.
The Fed indicated the economy was growing moderately and job gains had been solid, but it noted that both overall inflation had declined and said it would "carefully monitor" price trends. Steady job creation in the economy has pushed the US unemployment rate to 4.3%, near a 16-year low.
The annual rate of Chinese GDP growth has been on a gradual upward trajectory over the past year, rising to 6.9% in the last quarter to June 2017. Tighter credit conditions imposed were expected to slow real estate investment. On the positive side retail sales and industrial production was up 11% and 7.6% respectively. This supports our contention over the last few years of extreme China angst that the authorities have the will and the means to support the economy when required.
The region’s economy is expanding as year on year growth was up 2.1%, the highest level seen since 2011. Confidence indicators are positive and business sentiment is at levels not seen for a long time. Unemployment across the region is at a nine-year low of 9.1%, GDP growth is expected to be 2.1% for 2017 and inflation of 1.5%.
A lot of this positivity appears to be from a pickup in world trade. The Euro has been one of the best performing currencies over this period increasing against the USD and most of the main crosses.
The outlook for Australia is moderate growth over the next one to two years, low inflation and an ‘on hold’ central bank, with the risks to growth still to the downside. The Australian economy managed to steer away from a negative GDP result in the March quarter thanks to a modest rise in consumer spending, higher business investment and a bounce back in inventories. Activity data in the second quarter has improved with retail sales spending and exports up, strong business conditions, but growth in 2017 is still likely to be about 2.0%.
Another positive is that the decline in resource sector spend will fade and momentum from other sectors outside of resources will support wage and employment growth in 2018.
The RBA left the cash rate unchanged at 1.50% in its August meeting with an indication they are in no hurry to move the cash rate from here, but the next move could be up.
Economic indicators continue to paint a solid outlook for the economy. There are pressures in some sectors with tourism facing infrastructure constraints, house construction running at close to full capacity and some mortgage interest rate increases. However, consumer confidence is solid, supported by firm house prices, low unemployment and increased government spending.
Over the June quarter, consumer price inflation did not change, reinforcing the Reserve Bank’s view that there is no need to raise interest rates at present. This zero movement in the CPI meant that the annual increase was lower-than expected at 1.7%, after reaching 2.2% in the March quarter. This means that the economy is not in danger of over-heating and there may not need to be any official cash rate hikes for some quarters.
Earnings momentum is now positive for all major equity regions and we expect this to continue, supported by a solid economic setting. A normalising global economy should allow central banks to unwind their ultra-accommodative interest rate policies. We believe that long bond yields are set to rise further during 2017 and 2018.
Improving economic growth around the world will generally support equities and challenge bonds. That’s because this growth is more ‘traditional’ in nature, arising from better employment and demand, and thus allowing prices (and potentially profits) to rise.