By Jeff Mitchell, Head of Investment Research, Australian Unity Personal Financial Services
The first six months of this year have seen further geopolitical events and apparent increases in terrorist attacks, yet major sharemarkets and economies continued to experience growth.
The world’s major developed economies are experiencing consistent if not rising economic growth at approximately 2.0% p.a. Importantly, it is evident the major developed economies are directionally more aligned now that they have been for some time (see Chart 1).
Here is a snapshot of how some economies are trending:
United States: Key economic indicators for the US continue to maintain a positive trend, with employment, industrial production and wages growth all improving in recent months.
Europe: Despite the Brexit vote, increased terrorist activity and political events, the Euro zone economy looks to be benefiting from significant monetary stimulus programs with economic growth rising by 1.9% annually. This growth was supported by fixed investment and domestic consumption which is positive for the region and a meaningful indication that, after an extended period, modest yet sustainable growth is returning to the region.
China: China has also experienced a modest rebound in its growth rate, back to an annualised official rate of 6.9% in the first quarter of 2017. While the current rate of growth is the slowest for 20 years it is none-the-less within the Chinese authorities’ target range of 6.5% to 7.0% p.a. Industrial production is improving, and with more resilient growth globally, demand for China’s exports will receive additional support as will China’s suppliers of raw materials including Australia.
Australia: Australia has now recorded 103 quarters to the 2017 March quarter without two straight quarters of negative economic growth, the longest period of statistical uninterrupted growth of a developed nation. Australia’s economic growth rate is currently at 2.1% p.a. which is slightly ahead of many developed world peers. Improving conditions in China have been supportive of our exports particularly the resources sector, though the recent fall in the iron ore price has reduced the revenue impact. The construction boom is maturing and while not over, has moderated, which in turn could see a softer growth rate in coming quarters.
Global sharemarkets more buoyant as economies strengthen
While geopolitical risk is elevated at the moment, sharemarkets do not seem to be acknowledging that risk. In fact, the opposite appears to be occurring with many sharemarkets at or near new highs.
It is important to note, though, that we do not see any immediate and apparent catalyst sufficient for investors to sell out of the major sharemarkets.
Indeed, despite the political uncertainty in Europe, North Korea furthering its nuclear aspirations, concerns about the Chinese corporate debt bubble, terror attacks and President Trump’s unconventional and combative style, most major sharemarkets have generally been agnostic toward these events.
Further, sharemarket investments are generally providing superior total returns to their competitors, and an equivalent and in many cases superior yield to bonds. Unless this dynamic changes, we can, for the near term at least, expect to see sharemarkets continue to be supported by investors.
Interest rates to remain low
Interest rates in the major developed economies have stayed relatively flat or drifted lower this year. While inflation has lifted modestly in some parts of the world, our expectation is that interest rates, including in Australia, will remain lower for longer relative to historical levels.
Property becoming expensive in Australia
Listed property has been used more as an alternative income source by investors, and this has seen listed property investments become borderline expensive.
Residential property, in Sydney and Melbourne in particular, remains expensive and vulnerable to any modest interest rate increases and acceleration of the banks’ tightening of lending conditions. There are signs that the apartment market has already begun to soften in those cities.
Many global financial markets appear to have entered a period of positive stability. And while not without risks, the recoveries in the major global economies continue while the threats of deflation and economic capitulation have dissipated somewhat.
Against this backdrop and historically low interest rates, we expect the current trend of cautious optimism to persist for the time being for major sharemarkets.