The share markets have performed well so far this year. This was initially attributed to the Trump Administration-inspired theme of a fiscally-stimulated U.S. economy but, pleasingly, more recently the optimism follows on the back of wider evidence of faster global economic growth and a happy outcome from the French presidential election.
In Australia, both the Reserve Bank of Australia and Treasury have recently predicted better times ahead and the latest economic data has also been encouraging. An improvement in local prospects would help justify somewhat expensive share valuations and could get local equity performance closer to the stronger results from overseas markets.
There has been a lot made of the growth forecasts used in the May 9 Budget. Treasury said that in the financial year ending this June, the economy grew by a distinctly subpar 1.75%, but it predicted that it will pick up to 2.75% growth in the June 2018 year, and to 3.0% the year after that, which would be fast enough to get the unemployment rate down a bit, to 5.5% in 2019. But interestingly, earlier in the month, the latest quarterly Statement on Monetary Policy from the RBA had come to the same broad conclusions, with growth expected to pick up (on the midpoint of the RBA’s forecasts) from 2% in the fiscal year just finishing to 3.25% in each of the coming two years. We should note too that there have been various false dawns in recent years that did not in the event lead to permanently faster growth, and some forecasters think the latest official forecasts will again disappoint. The view of the RBA however is encouraging.
And further, I have been to briefings from five respected portfolio managers in recent weeks and the overriding tone is one of optimism and a sense of stabilising economic conditions world-wide. There is certainly a recognition of geo-political risks around the world but not a single manager said that all this military chest-beating is changing their approach to business. Still, we must note that the markets themselves will react as they react, with volatility a constant partner to some degree, but the fact that the fundamental economic bases are sound allows some room for genuine confidence.
In the US, forecasters remain confident about the outlook, and news from the rest of the world is also good, particularly in the formerly sluggish Eurozone where a wide range of indicators are pointing to an acceleration in economic activity. The latest IHS Markit Eurozone “composite” surveys (taking in both manufacturing and services) “portray an economy that is growing at an encouragingly robust pace and that risks are moving from the downside to a more balanced situation.
The consensus view is one of synchronised and accelerating global growth. Ausbil’s investment chief described it as the best economic environment in a global sense in more than a decade – “the fundamentals will overcome geopolitical uncertainty”.
The Aussie Dollar: one interesting feature of these recent analyst briefings has been the wide range of views on the $A. I have always thought currencies are a tricky thing to predict and maybe it’s not just me…. As Morningstar noted in their May Outlook, “the Commonwealth Bank, for example, sees the Australian dollar at USD 0.78 in a year’s time, up 4 cents on today’s level. However, most forecasters take a more bearish view. With interest rate differentials widening against the Australian dollar as the Fed raises rates while the RBA stands pat, and with some further relapse in key commodity prices such as for iron ore, the Australian dollar could well weaken. And the other three big banks see the Australian dollar lower, at around the USD 0.68-USD 0.70 mark, in a year’s time.”
The Ausbil economist I referred to above shared the same view as CBA, so there is a pretty wide range of views out there, and all are quite firmly sticking with their predictions.
Sources: Morningstar Research; CBA Research; RBA, Ausbil.