An outbreak of the jitters
The Aussie sharemarket is likely to underperform its global peers
OUTLOOKO Shane Oliver
resources, bank and consumer shares,
with a “fear of Amazon” also impacting
the latter.
Fortunately, the drag from falling min-
ing investment is fading, public capital
spending is rising strongly and net export
volumes should return to boosting growth
beyond the disruption from cyclone Deb-
bie. As a result a recession is unlikely. And
in the absence of a continuing apartment
supply surge, much higher interest rates
and/or much higher unemployment, a
5%-10% cyclical downturn in average
property prices is far more likely than
a 20%-plus crash.
But the drags referred to abovemean Australian growth is likely to
remain mediocre and well below the 3%
that the Reserve Bank and federal
government are assuming.
This means the risks are skewed
towards another Reserve Bank rate cut
later this year, a resumption in the down-
trend in the $A taking it below US70¢ and
a continuation of the relative underper-
formance of Australian shares compared
with global shares.
Key indicators to watch locally over
the next month include employment
growth, retail sales and home price
data as a guide to whether the
Reserve Bank can, and will,
cut rates again.
Globally, risks around
President Trump in relation
to the FBI/Russia probe ver-
sus progress in terms of cut-
ting taxes and infrastructure
spending, North Korea and
prospects for an early Italian
election are all worth keeping
an eye on as potential drivers
of a short-term seasonal pull-
back in shares.
But notwithstanding
short-term uncertainties,
the combination of reason-
able valuations in most
sharemarkets, global
growth and profits looking
good and global monetary
conditions remaining sup-
portive means that the broad
trend in shares is likely to
remain up. This includes the
Australian sharemarket. It’s just
that it is likely to remain a relative
underperformer compared with
global shares.F
rom around May to September/
October, I normally feel a bit
nervous about the risk of a pullback
in shares. The old saying “sell in May and
go away and come back on St Leger Day”
is really stuck in my mind.
Most major sharemarket falls have
occurred in this period, including those of
1929 and 1987 and during the worst of the
GFC. What’s more, shares have had good
gains from “bear market” lows in February
last year and as usual there is no shortage
of calls for the next crash.
However, while it’s been a case of so far
so good for global shares, which have been
underpinned by good economic and profit
news, we appear to be going through
another bout of uncertainty regarding the
Australian economy. The good news is
that the economy grew again in the March
quarter, taking us to an impressive 103
quarters without a recession. How-
ever, growth has slowed to a crawl
and the wariness around Australia
is threefold:- First, the boost to national
income from a rebound in iron
ore and other commodity prices
has now in large part reversed. - Second, the housing boom
looks to be over, with a peak in
building approvals pointing to
slowing housing construction
and increasing signs we have
seen the top in Melbourne and
Sydney home prices, at least in
terms of momentum. - Finally, the consumer is being
constrained by record low wage
growth, high under-em-
ployment and a likely
fading of wealth
effects as the housing
boom fades.
These forces
are weighing on
Shane Oliver is head of investment
strategy and chief economist,
AMP Capital.