Evans and Partners

Spring clean in Fall

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The past few years have seen the best combination of factors for markets: improving economies, easy policy settings, low inflation and strong earnings. However, the major improvement in global growth may now be over and synchronised recovery may now give way to a more diverse range of outcomes.

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Watching and waiting

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We review how February’s market volatility has affected valuations across the asset classes. Equity valuations have improved significantly; credit has been surprisingly resilient; bond yields have moved closer to normal but have some scope further to fall; and the $A has moved closer to our fair value estimates.

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Central bankers called to action

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We expect major changes in monetary policy this year across the globe, including from the RBA. We now assume two raise rates in Australia in 2018. Markets are not fully positioned for hikes in Australia and Europe. These expectations are more aggressive than what is currently priced into markets.

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The Outlook for 2018

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During 2017 the stars aligned with rising GDP and earnings, falling inflation and easy monetary policy. These effects will carry into 2018 but they will fade. The critical factors will be the pace of reform in China and whether inflation returns as an issue for central banks.

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Can equities do it again in ’18?

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It has been a remarkable period for global equities since early 2016. Global equities have returned around 40% over that time, compared with a 2% return for global bonds. All the stars have aligned for equities over this period; better global growth and earnings has occurred at the same time as inflation has fallen, monetary policy has remained easy and the $US has weakened.

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The Financial Engineer – Australian Equities Portfolio Strategy

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The market has positioned itself for rate rises by the RBA; bond rates and the $A have risen and interest-rate sensitive stocks have been hit. We see a rate rise from the RBA as unlikely this calendar year.  The latest CPI data showed inflation below the RBA’s target and the Australian economy faces more challenges from slowing housing construction and pressures on consumers from higher mortgage rates and electricity prices.

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Fifty Trades on Grey

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Demographics played a major role in the era of higher growth, volatile inflation and rising asset prices in the 1980s and 1990s and will be heavily influential again over the next 20 years as baby boomers leave the workforce.

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