The Australian economy over the long term has been steady despite the mining crash experienced earlier this decade.This year saw a slightly tougher time due to cyclone Debbie, which hit the exports and construction industry. 1st quarter growth was just 0.3% in March and annual growth slowed to 1.7% year-on-year, its weakest since the global financial crisis (GFC). In second quarter, cyclone Debbie caused a sharper disruption than expected due to major decline in coal exports in April.
Key Points to Consider:
|•||Data points indicates a low consumer confidence due to higher underemployment, negligible wage growth, and growing household expenditure driven by rising energy prices.|
|•||Housing property market has slowed with a decline in housing construction activity and a likely peak in Sydney and Melbourne property price growth supported by factors such as rising supply, poor affordability, tighter lending standards and increasing bank rates.|
|•||Public infrastructure investment is up by 9.5% over the last year, supported by privatisation projects which financed the state infrastructure spending.|
|•||As the impact of cyclone Debbie diminishes, net exports and trade are expected to contribute to growth as resource projects for gas complete and services exports continue to strengthen.|
|•||The probability of another RBA rate cut is moderate with the Reserve Bank of Australia (RBA) remaining reluctant to cut rates again.|
Tips for investors
In the current market environment, Australian-based investors should consider:
|•||Global over Australian shares: Australian shares have been underperforming global shares since October 2009 (Excluding Dividends), remaining well below their pre- GFC peak. This echoes relatively tighter monetary policy in Australia, the commodity crash, the slow impact of the increase in the Australian dollar above par in 2010 and regression towards the mean of the 2000 to 2009 outperformance by Australian shares. We expect ASX200 to trend up by year-end, but global shares are likely to outperform the Australian market with their peaks reaching higher.|
|•||Exposure to foreign currency: Amidst the expectations of US Federal reserve likely to gradually raise rates and the RBA on hold or potentially cutting rates again, a downside risk for Australian dollar is inevitable. To offset this risk, an effective strategy to maintain a decent exposure to foreign currency is to leave a proportion of global shares unhedged.|
|•||Inflation protected over Nominal bonds: Inflation expectations have sprung back to life around the world, followed by Trump’s reflation strategies. The recovery has been from a low base − particularly in Europe and Japan − but the direction of travel since mid-2016 is clear. Yet we do see risks in the near term as markets expectations about wage growth and a potential slide in oil prices remain elusive. We still see reasons to favor inflation-protected over nominal bonds in the medium term, especially in the eurozone. Our base case is that the European Central Bank and Bank of Japan will likely keep policy accommodative to ensure that inflation moves closer to target.|
Infrastructure as a diversifying asset: Defensive equities such as infrastructure may underperform in a rising interest rate environment, due to sizable debt loads associated with these projects. However, these stocks are still expected to deliver solid investment returns over the medium term and should be retained within portfolios given the potential volatility in the cyclical recovery. Furthermore, the recent federal budget by Australian government outlined a $75 billion program of infrastructure spending over the next 10 years, indicating promising income returns for conservative investors.
In conclusion, key things to watch include a softening in jobs data; continued weak consumer spending; another downwards revision in RBA growth and inflation forecasts; significant cooling in the Sydney and Melbourne property markets; and the Australian dollar remaining relatively resilient. To counteract these expectations, investors will have to take an active approach in managing their portfolios and making them efficient, whilst ensuring that their asset allocation is optimised to take these outlooks into account.
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