The outlook for the world economy continues to strengthen despite seemingly constant and sometimes self-inflicted geo-political issues.

Noticeable improvement is particularly evident in the Eurozone which has for so long been in the doldrums.  But share markets are high which makes them vulnerable to the inevitable normalisation (increase) of interest rates.  This is already under way in the United States and the United Kingdom but is likely some time away in the Eurozone and Japan.  It may also be quite a way off here in Australia too – see RBA Interest rates section further below.

In Australia, after some quite long patches of underperformance Australian shares have performed quite strongly through the end of October and throughout November. Some wobbles might come along with the announcement of a Royal Commission into the banks as we note that the Big 4 banks make up a very large proportion of the share index weight therefore significant short-term movement up or down in bank stocks moves the entire index.  Overall though, the year-to-date numbers for Australian shares are looking pretty good.

As to the future, we have continued to see the usual array of surveys and opinion pieces containing mixed data and varying outlooks. So, for me, it is business as usual…

Global markets have also performed strongly this year to date.   Emerging markets such as India and Brazil have been the stars of the show and it is appropriate to remind clients at this time that we tap into the emerging markets story for you via your investments in global managers such as Magellan, Platinum, Franklin Templeton and others. And while there is a lot of talk about the record highs of the US sharemarkets in particular, it is important to note that the underlying economic fundamentals continue to strengthen not only in the US but generally speaking in all developed economic regions. This is significant as it’s the first time we have seen this synchronised global growth since pre-GFC days.

The pace of business activity across the global economy appears to be accelerating and this alone can create momentum as it generates confidence which in turn generates more activity.

Challenges:   apart from the ever present geopolitical flare-ups the main danger at present might be that investors are still a little complacent which means that ‘risk’ is being undervalued.  So it might just be that the first sign of unhappy surprises in data or a wobble of some other kind could see a strong reaction or overreaction in the markets, potentially jolting of investors out of their malaise.

I know we have referred to this a few times over the past year, but the VIX Index chart demonstrates just how calm the investment markets appear to be despite heightening tensions in world politics and markets running at historic highs. See chart, and also further below is a very informative piece from Investors Mutual which explains the logic behind the VIX chart.

My view?    It is steady as she goes for clients as far as their exposures to growth assets are concerned: we are always looking through the noise and thinking long-term. What is comforting is that economic fundamentals are sound and if anything appear to be strengthening although it may not feel that way here in Australia where our economy seems to be lagging or at best bobbing along without any real direction until something happens to improve confidence and get wages growth moving upward. The rest of it, in particular the daily news circus, is little more than a distraction.

Chart:  low investor anxiety (in red) versus S&P500 US index (purple): low anxiety accompanies strong performance and vice versa, see 2007!

Sources:  Morningstar Research;  CBA Research & ComSec; Yahoo Finance chart.