Despitetherisks,returns froma diversifiedportfolio shouldremainpositive
Things are looking up
OUTLOOK Shane Oliver
re-elect presidents when unemployment
is rising and oil prices are surging.- Share valuations are not excessive.
Valuation measures that allow for low
interest rates and bond yields show shares
to be fair value or cheap. - While unemployment is expected to rise
to 5.5% in Australia this year, it should be
limited as infrastructure spending remains
strong, mining investment bottoms out,
export demand holds up with overall
growth helped by monetary and fiscal
stimulus and the low Australian dollar.
The threats around trade and geopoliti-
cal risks, along with the tendency for
seasonal weakness out to September-
October, could see a pullback in share-
markets and returns are likely to be con-
strained. But easy money and the absence
of large-scale economic excess should
help extend the investment cycle and keep
returns from a well-diversified portfolio
positive and reasonable.
Australian shares are at risk of a short-
term correction after a period of strong
gains, but OK valuations, reasonable
economic growth and profits, and even
easier monetary conditions should see the
broad trend in shares remain up.
What to watch
The key things to keep an eye on in the
month ahead are: global business condi-
tions indexes for any deeper slowing; the
US trade war with China (this needs to
be resolved soon); Middle East tensions
around Iran; and Australian unemploy-
ment and house prices.
The Reserve Bank is expected to leave
interest rates on hold this month, but more
cuts are likely in November and February
next year, ultimately taking the cash rate
down to 0.5%, which is also likely to
push the $A down to around $US0.65.Shane Oliver is chief economist at
AMP Capital.T
he past financial year has been a
roller-coaster ride for investors.
Sharemarkets plunged into Christ-
mas on trade war, Fed and growth fears
only to then rebound as inflation fell and
central banks moved towards easing,
resulting in pretty good returns for inves-
tors from most asset classes except cash.First the bad news
- President Trump’s trade wars are
adversely affecting business confidence
and investment. - Global growth indicators are well down
from their highs at the start of last year. - The risk of conflict with Iran has esca-
lated. As roughly 20% of global oil demand
flows through the Strait of Hormuz, its
disruption would threaten sharply higher
oil prices. - US political risk is likely to ramp
up with the debt ceiling needing to be
increased around September and Demo-
cratic presidential candidates
highlighting a sharp left-
ward lurch. - Eurozone risks
remain with an
increased risk
of a no-deal
Brexit, which
would be a big
drag on the
UK economy
and a small
drag on Europe. More important for the
eurozone are the ongoing tensions around
the Italian budget deficit.- In Australia, while house prices show
signs of being at or near the bottom, the
downturn in the residential property con-
struction cycle and consumer uncertainty
will keep overall economic growth con-
strained and push up unemployment. This
risks another leg-down in property prices,
which in turn would further weigh on
economic growth.
But it’s not all negative
- While global growth indicators are soft,
it still looks like the growth slowdowns of
2011-12 and 2015-16. - The fall in global inflation has seen cen-
tral banks move from tightening to easing
to various degrees, providing a renewed
stimulus to growth. - There is still little sign of the sort of
global excesses that normally precede
recessions – there is still spare capaci-
ty globally, growth in private debt
remains moderate, investment
as a share of GDP is around
average or below, wages
growth and inflation remain
low and we are yet to see
a generalised euphoria in
asset prices. The current
growth slowdown globally
may be seen as extending
the investment
cycle by delaying
the build-up of
recession driving
excesses.- It is in Pres-
ident Trump’s
interest to resolve
his trade wars and
the tensions with
Iran in a non-dis-
ruptive way as
Americans don’t
- It is in Pres-