Overseas and domestic equity markets have continued to recover from a loss of confidence in January/February. The outlook is for continued global growth at a relatively slow rate, with a range of downside risks, and with only modest prospects for global corporate profits. Many asset classes look expensive against this backdrop, largely due to cash and bond yields remaining very low and now looking to stay at very low levels for longer than previously thought. There is some recent evidence that the Australian economy may be picking up speed, which would help justify somewhat expensive valuations for local equities.
Australian shares have picked up from their January/February selloff, but the year to date gains has not yet been large enough to return investors to the winning circle. The S&P/ASX 200 Index is still 2.6% below where it started 2016. Looking ahead: recent news has mostly been on the positive side, but not so positive as to signal a definitive emergence from an extended period of subpar growth. In particular, the latest labour market news was also encouraging. The latest business surveys also show some pickup in activity. The March survey from National Australia Bank found that “this NAB Business Survey revealed a significant improvement in both business conditions and confidence, suggesting the domestic business environment not only remains favourable but appears to be strengthening further … All three components of conditions (trading, profits and employment) improved during the month”. See chart below
However, offsetting the mostly good news has been weaker consumer confidence, in March at least. According to the Westpac-Melbourne Institute Consumer Sentiment Survey, while households were aware that the jobs market was improving they have become less confident about the economy as a whole.
Like Australian shares, World shares, which had slumped in January and early February, recovered in later February and March and have continued to rise modestly in the first half of April. The U.S. market has been an important contributor, with the S&P 500 Index gaining 1.8% year to date. Most European markets did relatively poorly. Somewhat surprisingly, given the financial uncertainties over a potential “Brexit” vote, U.K. shares are up slightly. The Japanese market remains the worst major market.
Looking ahead: At its April meeting, Morningstar’s Expert Asset Allocation panel “reiterated its longstanding view of a global economy continuing to grow, but at a slower than usual pace, and with pronounced regional differences. As a result, the global economic backdrop is one which is consistent, at best, with only modest growth in corporate profits.” Modest global growth remains the most likely scenario.
The IMF’s latest (early April) update to its authoritative World Economic Outlook (WEO) showed it expects ongoing growth in the world economy, if not quite at the rate it was expecting in its preceding (January) WEO. It is expecting global output growth this year of 3.2% (0.2% lower than its January prediction). This is expected to pick up a little to 3.5% in 2017 (a marginal 0.1% lower than its previous forecast), with the developing economies making most of the running (4.1% growth this year), and the more advanced economies growing more slowly (1.9% this year).
In his presentation to clients last week, Craig James included the following slide which supports the positive business confidence survey reported above. It shows that most ASX 200 listed companies (90%) are recording profits, and are issuing dividends to investors. Both figures are well above average.
And for the record, he predicts the local share market to be back to around 5500-5700 by the end of 2016. The rest of his tips for 2016 are shown in the table below:
Sources: Morningstar research/Economic Update; RBA. Charts: CommSec