by PlannerWeb
spacer
     Financial Planning Lending Services
  Latest News
Hot Issues
After the Australian household debt and east coast housing booms
Why it pays to contribute to your partner's super
Now’s the time for tax planning
Australia by numbers – Update
How to deal with financial stress – nearly 1 in 3 affected
Federal Budget 2018 – Overview
Your Budget
4 components of our 2018 Federal Budget
Bitcoin – is it really for you?
Spread your money, reduce risk
Love and money? It’s not about control
The pullback in shares - seven reasons not to be too concerned
Australia. All you need to know to be the expert.
Australian’s love affair with debt - how big is the risk?
5 ways to keep a cool head in a falling share market
2018 – a list of lists regarding the macro investment outlook
Sports lovers enjoy better financial fitness
Where Australia is at. Our leading indicators.
The year that was and the year ahead
Add some extra cash to your New Year
New year, new financial resolutions
Will Australian house prices crash?
Where are we in the global investment cycle and what's the risk of a 1987 style crash?
Money steps for women
Resources on our site to help you, your family and your friends.
Australian Dietary Guidelines and healthy eating chart (PDF)
How to retire, your way
Prepare for retirement without missing out today
Be the boss of your cash
The Australian economy bounces back again
Should you lend money to family?
Money mistakes people make in their 50s and 60s
Australian Dietary Guidelines and healthy eating chart (PDF)
Powerful Budgeting, cash flow and Super Tools available on our site.
5 ways Australians will use their tax return this year
Australia's leading causes of death - ABS
The threat of war with North Korea
Six traits of Australians living the dream
The break higher in the Australian dollar is likely to be limited
Money can buy you happiness, you’re just spending it wrong
Key Economic Indicators, 2017 – updated
Helping your kids buy a home
It pays to contribute to your partner's super
How to cope with losing independence
Transition to retirement income streams
The Australian economy hits another rough patch
Watch out for tax scams
The three core pillars of this year's budget
Federal Budget - 2017-18 - Overview
Federal Budget - 2017-18 - Budget documents
Make the most of the current super caps
Five, four, three… it’s not too late to get more in super
Super changes are coming
What’s your debt age?
Australian cash rate on hold
Super changes this financial year - Dr Shane Oliver - video
The door is closing on super’s current caps
Is Donald Trump's honeymoon with investors over?
Estate planning and why you need a super plan
What does a comfortable retirement look like?
Give your career a health check
Super changes from July 2017
Changes to the Age Pension assets test
Keep your money safe over the silly season
Looking ahead at 2017
Review of 2016, outlook for 2017 - looking better despite the political noise
54.2 million worries
Five tips for happy healthy ageing
Thinking about managing your own super?
Sending more to the tax office than you should?
Government pulls back on proposed changes to super
Market Update - What to consider when investing in a low return world
Stop!! Don't do a paper Budget, use our online budgeting tools instead.
Oliver's Insight - Megatrends
Value of Advice
A growing family doesn't have to blow the budget
Blinded by optimism
Thinking about managing your own super?
Brexit and other key developments
Brexit wins
Commentary on major issues - AMP
Five money habits for a happy financial year
2016-17 Federal Budget - AMP
2016 Budget in detail
How (and why) to talk to your adult children about insurance
Procrastination: Just do it. Eventually.
Why Australian property won't collapse
The demand for global infrastructure
Help achieve your investment goals with dynamic asset allocation
The Power of Budgeting
Jump retirement hurdles with a coach
Preparing for the time of your life
A Super Loan for all reasons
Making a smooth transition
Australian Government - Budget 2015
Budget 2015 - some professional opinions
Achieving a comfortable retirement
Is off-the-plan on the money?
Should I take my super as a lump sum or not?
Do you have a key person in your business?
Tips for success in a competitive job market
All you need to know about buying at auction
To sell or not to sell?
Saving in a material world
2018 – a list of lists regarding the macro investment outlook

Dr Shane Oliver
Head of Investment Strategy and Chief Economist 
AMP Capital 



           

 

Key points

 

  1. 2018 is likely to remain good for diversified investors. The investment cycle still favours growth assets over cash and bonds. But expect more volatile and constrained returns as US inflation starts to turn up. 
  2. Watch US inflation, bond yields, President Trump, the Italian election, China, the Sydney and Melbourne property markets and global business conditions PMIs.

 

Introduction

 

Although 2017 saw the usual worry list – around President Trump, elections in Europe, China, North Korea and Australian property – it was good for investors. Balanced super funds had returns around 10%, which is pretty good given inflation was around 2%. This year has started favourably but volatility may pick up as geopolitical threats loom a little larger and US inflation rises. This note provides a summary of key insights on the global investment outlook in simple dot point form.

 

Five lessons from 2017

  • The global economy is finally emerging from its post-Global Financial Crisis (GFC) hangover. Talk of secular stagnation was overdone. Slow global growth since the GFC largely reflected a typical constrained aftermath from a major financial crisis. 
  • The withdrawal of extreme monetary stimulus won’t cause economic chaos if central banks don’t move too quickly and recovery is entrenched – this is clear in the US where the Fed has now been able to move away from zero interest rates and start reversing quantitative easing. 
  • The Eurozone is far more resilient than many give it credit for – with voters across numerous countries opting for centrist pro-Euro parties as opposed to the populist parties that many said were going to sweep to power. 
  • Turn down the noise – retreating to cash on talk of war with North Korea, worries about Trump, ahead of elections in Europe and perennial talk of a property crash in Australia – would have been costly in terms of missed returns. 
  • Stick to an investment strategy – 2017 had its share of distractions for investors but they would have done okay provided they stuck to an investment strategy that prevented them from getting blown around by various scares.

 

Key themes for 2018

  • Still in the sweet spot for investors – a further rise in global growth to around 3.9%, driving solid earnings growth with continuing low inflation and easy global monetary conditions should keep investment returns favourable. 
  • But expect more volatility as US inflation stirs, the Fed hikes more than the market expects, other central banks edge towards less stimulus and political risk increases. 
  • Apart from the likelihood of more volatility through the year, global shares are likely to trend higher through 2018 on the back of rising earnings and still easy monetary conditions. 
  • Australian shares are likely to do okay but underperform global shares with returns around 8% with moderate earnings growth. Expect the ASX 200 to reach 6300. 
  • Commodity prices are likely to push up with global growth. 
  • Low yields and capital losses from a gradual rise in bond yields are likely to see low returns from bonds. 
  • Unlisted commercial property & infrastructure are still likely to benefit from the search for yield, but it is waning and listed variants are vulnerable to rising bond yields. 
  • National capital city residential property price gains are expected to slow to around zero as the air comes out of the Sydney and Melbourne property boom and prices fall by around 5%, but Perth and Darwin bottom out, Adelaide and Brisbane see moderate gains and Hobart booms. 
  • Cash & bank deposit returns to remain poor at around 2%. 
  • After a short-term further bounce higher, the $A is likely to fall against the $US as the gap between the Fed Funds rate and the RBA’s cash rate goes negative. Solid commodity prices will provide a floor for the $A, though.

 

Seven things to watch

  • President Trump – the risks around the Mueller inquiry and renewed political pressure from the mid-term elections risks more populist policies (with trade conflict with China and Mexico and a possible escalation with North Korea and Iran high on the list) after the business-friendly policies of 2017. 
  • How quickly US inflation turns up – a rapid upswing would see a far more aggressive Fed, a strong rise in the $US and bond yields, and pressure on emerging market shares. 
  • Bond yields – a rapid rise in bond yields would be bad for shares and assets that benefitted from the search for yield. 
  • The March Italian election – the Five Star Movement is likely to do well, which may create investor angst, but they are unlikely to be able to form government and are less anti-Euro. Moreover, support for the Euro remains high in the rest of Europe so Italy is unlikely to trigger a domino effect. 
  • Whether China, post the Party Congress, embarks on a more reform focussed agenda, slowing short-term growth. 
  • The Sydney and Melbourne property markets in Australia – too fast a slowdown could threaten broader growth. 
  • Global business conditions indicators (PMIs). 

 

Four reasons why global growth is likely be strong

  • The post-GFC hangover has faded with high levels of confidence helping drive stronger investment and consumer spending. Self-sustaining growth has returned.
  • Global monetary conditions are still easy. While some fret about a flattening US yield curve, this is unlikely to signal a growth downturn because it’s been driven by rising short rates rather than falling long rates, high demand for long bonds as a portfolio diversifier and continuing QE in Europe and Japan holding down global and hence US bond yields. 
  • Fiscal austerity has faded, with the US seeing stimulus. 
  • We have not seen the excesses – massive debt growth, overinvestment, capacity constraints or excessive inflation – that normally precede recessions.

 

Three reasons why a grizzly bear market is unlikely

Shares are overdue a decent correction and even a brief (or gummy) bear market (where shares fall 20% but are back up a year after) is possible. But a deep (or grizzly) bear (where shares fall 20% and a year after are even lower) is unlikely:

  • A recession is unlikely with growth more likely to accelerate. Most grizzly bear markets are associated with recession. 
  • Short-term sentiment measures are bullish but longer-term sentiment and positioning suggests investors are far from euphoric. (Some of the euphoria may have even been siphoned off to schemes like Bitcoin!) 
  • The liquidity backdrop for shares is still positive, with low rates still providing an inducement to allocate to shares.

 

Three reasons why risks around Trump may rise a bit

For 2017, we expected Trump the business-friendly pragmatist to dominate, but there are several reasons why we may see a bit more of Trump the populist in 2018:

  • Much of his business-friendly policy agenda has been implemented notably tax reform and deregulation. So the good news from these sources is largely behind us. 
  • The Mueller inquiry is getting closer to Trump. We don’t see the Republicans impeaching Trump unless there is clear evidence of wrongdoing. Even if he is replaced by Vice-President Pence, policy wouldn’t change much – but markets may worry about it and this may be intensified if Trump lashes out and creates populist distractions. 
  • The mid-term Congressional elections in November (with polling pointing to the GOP possibly losing control of the House) will see a renewed focus on issues around trade (as evident in just imposed US tariffs on solar panels & washing machines) and inequality as Trump tries to boost his base.

 

But the 2016 fears around Trump are still unlikely to be realised – he has a focus on growth and jobs and won’t want to threaten this. A full on trade war with Mexico or China is unlikely as a surge in consumer prices won’t go down well with his base. 

 

Three reasons why the trend in bond yields is likely up

  • Deflation risks have retreated and are being replaced by inflation risks as global spare capacity is being gradually used up (led by the US) and commodity prices trend higher. 
  • Long bond yields remain well below levels consistent with nominal growth of around 3-3.5% in developed countries. 
  • Bonds are over-loved with a huge post-GFC inflow.

 

Three reasons why Chinese growth won’t slow much

  • The Chinese Government’s tolerance for a sharp slowing in growth is low given the risk of social instability it may bring. 
  • Monetary & fiscal policy has not been tightened significantly. 
  • In the absence of much lower savings (the main driver of debt growth), rapid deleveraging would be dangerous.

 

Five reasons Australia won't have a recession (again)

A downturn in the housing cycle and uncertainty around the consumer are the main risks facing Australia but against this:

  • The drag from falling mining investment has faded. 
  • Non-mining investment and infrastructure spending are turning up. 
  • National income is no longer falling as commodity prices have stabilised or are trending higher. 
  • Stronger export volumes from resource projects like LNG and stronger global growth will provide an additional boost. 
  • Interest rates can still fall further if needed.

The next move in Australian interest rates will likely be up, but the RBA will wait for more confidence on growth & that inflation has bottomed before starting to gradually hike later this year. 

 

Five reasons to expect more share market volatility

  • As US inflation rises it will likely result in a more aggressive Fed than the market is allowing for. 
  • Geopolitics may be a bit more negative than it was in 2017 if Trump becomes more populist. 
  • Volatility indexes like VIX are around record lows and net speculative short positions on VIX (bets volatility will fall further) are near record highs, warning of some reversal. 
  • Low volatility years like 2017 often lead more volatile years. 
  • The US share market is expensive on some measures.

 

Three reasons Bitcoin is a bad “investment”

  • It’s impossible to value, generating no income flow – making it highly speculative (as evidenced in extreme volatility) and subject to a crowd-driven mania (as we saw in 2017). 
  • New supply potential is huge – eg, from other crypto currencies and futures trading which is allowing easy shorting and syphoning away demand. 
  • Governments are likely to ramp up regulation of it, are unlikely to give up their monopoly of legal tender (and the “seigniorage” they earn from it) and will likely develop their own crypto currencies using block chain.

 

Nine things investors should remember

  • The power of compound returns – saving regularly in growth assets can grow wealth substantially over long periods. Using the “rule of 72”, it will take 29 years to double an asset’s value if it returns 2.5% pa (ie 72/2.5) but only 9 years if the asset returns 8% pa. 
  • The cycle lives on – markets cycle up and down and we need to allow for it and not get thrown off by rough patches. 
  • Diversify – don’t put all your eggs in one basket. 
  • Turn down the noise – increasing social media and the competition for your eyes and ears is creating much noise around investing that is really just a distraction. 
  • Starting point valuations matter – for example still low bond yields will mean low medium term bond return
  • Remember that while shares can be volatile, the income stream from a diversified portfolio of shares is more stable over time and higher than the income from bank deposits. 
  • Avoid the crowd – at extremes it’s invariably wrong. 
  • Focus on investments with sustainable, decent cash flows – not financial engineering and schemes like Bitcoin. 
  • Accept that it’s a low nominal return world – when inflation is 2%, a 10% superannuation return is pretty good (and probably not sustainable at that rate). 

 

 

 

Dr Shane Oliver

Head of Investment Strategy and Chief Economist 

AMP Capital 

 

-------------------------------------------------------------------

 

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

   HLB Mann Judd Financial Planning (SA) Pty Ltd

   82-86 Fullarton Rd Norwood SA 5067 | Phone 08-8130 2080 | Fax08-8363 1980 | E-mail fp@hlbsa.com.au

AXA Financial Planning is only responsible for advice provided by HLB Mann Judd under the terms of Authorisation (Authorised Representative) of the Licensee.

  I have read & agree to the terms described above