Markets, News, Views, Commentaries… (August 2017)

World equity markets, despite a setback at the outbreak of acute tensions over North Korea, have continued to make progress…

The Australian economy has continued to grow more slowly than usual: While business conditions have improved, consumer sentiment has weakened, and the resulting subpar growth is constraining companies’ profit prospects. The very modest gains in share prices, at a time when other developed economies’ markets have generally been rising faster, reflect the difficulty the local economy has faced in breaking out of its post-mining-boom slowdown. Although there are some promising signs that business conditions are finally taking a clear turn for the better, consumer sentiment remains weak and the equity market may continue to be side-lined by ongoing subpar growth.

Global equity markets, despite a setback at the outbreak of acute tensions over North Korea, have continued to make progress as the world economy continues to improve, with good news out of the US, the Eurozone, and Japan.  Good news in the U.S. carries more weight than in other markets — U.S. share valuations are particularly high, and good profit outcomes are essential to meet investors’ high expectations — but it has also been buttressed by better-than-expected outcomes elsewhere.

Interestingly too, Tony Crescenzi said this week that he believes the US market is highly valued at present because of underlying economic strength rather than the Trump-fuelled boost that many commentators still credit (or blame…).  Tony Crescenzi is a New York based senior official and market strategist for PIMCO.

The previously struggling Eurozone is showing every sign of a decent improvement in economic activity and Japan, which has had an on-again off-again pattern of growth, has now managed to string together six successive quarters of economic growth for the first time in over a decade.

As illustrated in last month’s Newsletter, a concern for analysts in recent times has been the apparent under-appreciation of risk highlighted by a very low VIX Index.  The VIX Index, which measures how much share price volatility investors expect to encounter from holding the S&P 500, continues to track at very low levels. On a scale where a reading of 80 is extreme (depths of the global financial crisis) and 40 is worrying (Greece/Eurozone financial crises), the VIX only hit 16 at the height of alarm about North Korea, and has since dropped back to 11.7, which is effectively an “all clear on the horizon” reading (the index rarely trades lower than 10).

On the plus side, this could be read as showing that share prices will continue to be resilient no matter what surprises emerge from Pyongyang or elsewhere. But more realistically, it likely reflects a short-sightedness about potential upsets.

Chart:  economic growth (GDP) numbers are looking good around the world….

Sources:  Morningstar Research; PIMCO Investment Managers;   CBA Research & ComSec; RBA.