Economic recoveries continue in Australia and beyond - which is positive for sharemarkets
Strengthening Australian economy
In Australia, the reporting season was mostly in line with market expectations and some solid results from consumer and housing related companies showed pockets of strength within the economy.
The Australian banking sector also continued to post resilient financial results. These were achieved despite the negative headlines in the media and the obvious pressures of declining interest rate margins, and slightly higher bad debt charges.
Another positive for the Australian sharemarket is that the materials sector which has fallen in size since the end of the resources boom has recently benefitted from higher commodity prices. If prices remain elevated, improvement in the fortunes of the major miners should help to maintain or improve Australia’s current 3.3% GDP growth rate. This would be a positive for the sharemarket generally.
Other sectors are likely to benefit from any further depreciation in the $A and would also aid Australia’s transition from the mining-led economy to one based more on education, services and consumption (which are less cyclical in nature).
As such, the long term outlook for Australian economic growth and share market return expectations remain positive.
A few concerns for Australian residential property
In the Australian residential property sector there are signs emerging of a short term peak in valuations. The construction of new housing has been at very high levels in Australia for some time and a possible oversupply of apartments in Brisbane and Melbourne is concerning.
If interest rates were to start to rise, investors should be prepared for an increase in volatility across the sector. However, a strong labour market, low unemployment, more restrictive bank loan approvals and low interest rate should limit possible downside.
International sharemarkets are faring well
Over the past five years many international share markets have benefited from an economic recovery and low interest rates.
In the US, the Federal election has taken some of the focus off the path of interest rates, however any interest rate rises are likely to be gradual which will better position the US economy to navigate its challenges. While US share valuations are high, the low interest rate environment should remain broadly supportive.
Other developed economies, especially in Europe, are also seeing improvements in economic signals. Sharemarket valuations are by no means extreme and the investment thesis for that region is becoming increasingly sound.
Although the UK, having decided to ‘Brexit’ the region, could present some challenges, the accommodative policy of central banks in that region should be a positive for long term economic growth.
The risk to Europe in the near term is more social and political in nature and will continue to see investors demand a larger risk premium to allocate capital to the region.
Although if Eurozone data releases continue to show positive signs such as declines in unemployment, high credit growth and improving consumer confidence, it is reasonable to expect that share markets should benefit.
Asian countries such as India and China are growing strongly
Emerging markets are also showing some signs of stability and capital has begun to flow toward the Asian region.
India is a source of optimism for global economic growth but their sharemarket valuations already incorporate a high level of success in the future.
The Chinese economy continues to experience solid growth albeit at more subdued levels recently.
Chinese corporate debt levels remain a concern for investors and Chinese authorities alike. While a risk, it does appear that policies to address the issue are being implemented and will hopefully see this issue managed out.
Onwards and upwards
As a collective, global sharemarket valuations are not overly expensive – the exception being while the US sharemarket which is at near record highs and appears fully valued.
There are many countries that are continuing to recover and appear to be attractive for investors over the long term. Examples include Australia, European countries such as Spain, France Germany and the UK and Asian countries like China and Korea.
A global recovery will continue to meet its challenges along the way but over the long term, investment participants have cause for cautious optimism.
by Jeff Mitchell, Head of Investment Research, Australian Unity Personal Financial Services
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