Reasons to stay chilled
Improving growth in Australia and overseas should underpin equity markets
OUTLOOKO George Lucas
low interest rate environment and the rap-
idly changing technological landscape.
The make-up of market indices today is
not only vastly different from 20 years ago;
it’s vastly different to what it was five years
ago.Givenitisthetechgiants–Apple,
Amazon,Alphabet–drivinggrowthof
the S&P 500, we believe that these models
are underestimating the impact that new
technology is having on economic growth.
As we get used to developing countriesThere is also the risk that interest rates
will rise faster globally than expected as
economies recover. But there is a flipside
to this, and the reason they are rising
is because economic and employment
growth is also better than expected.
So it is not a slam dunk that the upside
interest rate surprise will be a major
negative for sharemarkets.
You won’t hear anybody shouting about
it but European economic growth was sim-
ilar to Australian growth over the past year
and there is reason for more optimism.A
s the weather cools off, and we
complain about having to chuck on
a light jumper at night, it’s easy to
see how we Australians are pretty spoilt,
and it’s not just with the climate ...
Our economy has beaten the Nether-
lands’ record for the longest spell without
a recession, currently sitting on a 102-quar-
ter streak. We’re enjoying a rebound in
commodity prices, not only benefiting our
resource-heavy index but also impacting
our deficit and reflecting a renewed
strength in the global economy. We
continue to defy expectations
with our employment market,
which is stronger than most fore-
casts last year across a number of
sectors. Despite being denied your
weekend swim, there is reason for us
to be optimistic as we approach winter!
This improvement in growth isn’t just
occurring in Australia but is a trend we’re
seeing in Europe, emerging markets like
China and India, and the US. It is a key
theme for 2017 and should provide ongoing
support to the equity markets. Another
is the expectation of a stronger US dollar
against the yen, the euro and many emerg-
ing market currencies. This should see a
boost to corporate earnings in many of
these countries, which will also provide
underlying strength to equity markets.
Much of the past six months has focused
on the US market and economy but it has
been emerging markets that have led the
charge in the performance of equities. But
as always after a long run, the bears start
to rear their heads and question how long it
can last. There has been a lot of talk about
how the S&P 500, the main benchmark for
the US markets, may be overvalued. We do
not think this is the case, though it does not
look cheap.
It is important to remember that the mod-
els used to determine the value of an index
are based on historical data, and while this
may be a predictor of the future, it does not
factor in current factors such as the veryGeorge Lucas is CEO and managing director
of Acorns.The reason rates are
rising is because growth
is better than expected
such as India, China and Brazil having
population-wide access to the latest
technology, we will begin to see why our
value models for the past 20 years have
become outdated.
There are always risks. European
political uncertainty continues to grab
the headlines but it may be overstated.
Last year taught us to never rule out a
surprise like Brexit and the right-wing
parties in the Netherlands and France
which were expected to disrupt EU
member states. But so far they have
had far less penetration than expected,
which should calm the market.