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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Despite Australia abandoning its clean energy target, recent global developments suggest to us that the clean energy revolution is accelerating and is increasingly being led by China.
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Equity markets have benefitted from better economic growth, declining inflation and easy liquidity conditions over the past two years. We expect a weaker, though still positive, outlook over the next year.
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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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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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The recent strong performance by equity markets has meant that much of the gain in shares that we expected in 2017 have already been achieved. The charts below show that Emerging Markets have returned nearly 20% this year and more than 10% since March.
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An analysis of China’s New Silk Road initiative, the impact for the global economy and investment implications.
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As of 27 February, the ASX200 at 5724, has risen 1.8% on a month to date. The rally this month has been US led, with the S&P500 up 4.0% month to date, the US corporate profit reporting season well received and continuing optimism of a more pro-growth US policy agenda.
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We review our EAP Core Drivers for the Australian banks in 2017 and are increasingly optimistic regarding the outlook for the sector. In particular:
1. Our margin outlook has improved
2. We see diminished regulatory risks
3. Impairments continue to be benign with some potential upside driven by commodities rallies.
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The ASX200 at 5440 at end November, provided a strong monthly return of 2.8% after the weakness evident from August to October. We see modest price appreciation prospects in the next 12 months as profit growth is delivered, partly offset by PE Ratio de-rating as bond yields move higher. Given US policy uncertainties (and the risks of a US policy mis-step), volatility risk is higher than normal, in our view.
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