United States shares are benefiting from stronger earnings growth as the global economy improves but monetary policy concerns are also occupying investors’ minds. Most economists expect at least one more rate rise in 2017 but, as always, the pace and timing of further interest rate rises will depend on the incoming economic data. Investors are also focused on the inevitable unwinding of the Federal Reserve’s extensive quantitative easing programme, with the Fed indicating that this could occur “relatively soon”. Whilst the Fed has indicated the move towards quantitative tightening will be gradual, the subsequent impact on bond yields will be a key factor to watch in coming months. The recent weakness in the US dollar is an unexpected positive for the market although if US interest rates rise again in coming months, the dollar may struggle to fall much further.
Recent data in Europe suggest the recovery is much stronger than previously anticipated and this bodes well for corporate profits. Whilst share markets in the region should continue to be supported by the liquidity effects of the European Central Bank’s accommodative monetary policy, including its quantitative easing (QE) programme, accelerating growth is prompting investors to debate the likely end of QE and a possible turn in the interest rate cycle. The political environment has improved in response to the election outcome in France, but politics remains a key risk given Italy’s unstable political environment, Theresa May’s very narrow win in the UK election and the ongoing Brexit process.
Signs of an improvement in growth are finally emerging in Japan, with five consecutive quarters of positive GDP growth and a pick-up in industrial production. This has started to support share market sentiment as it improves the outlook for domestic corporate profits. Japan’s share market is also leveraged to weakness in the yen which improves the competitiveness of Japan’s large listed export sector. This suggests the market may find it hard to rally further whilst the US dollar is on its current weaker trend.
The strength of the Chinese economy is hard to gauge at present. Although infrastructure spending remains robust, the government is engineering a slowdown in the property market via tighter liquidity and macro prudential restrictions. PMI data have been mixed in recent months but rebounded somewhat in June. Recent industrial production and retail sales data also improved. This tentative optimism has boosted commodity prices in recent weeks but a sustained rally is likely to require more ongoing evidence of an improvement in Chinese growth. MSCI’s decision to include some China A-shares in its Emerging Market Index is a positive development for the market longer term, although it is still a year away and China’s weight in the index will initially be very small at only 0.73%.
The Australian share market is facing some headwinds at present, with the strength in the Australian dollar undermining the outlook for companies with offshore earnings and investors increasingly nervous about a sharp slowing in the domestic property market. The latter has negatively impacted banks and consumer facing stocks as investors fear a slowdown in consumption if the property market comes under pressure. The potential entry of Amazon into the Australian market is also contributing to the de-rating of retail stocks. The resource sector has rallied in response to better Chinese growth data although for this to be sustained, the Chinese economy will need to show ongoing signs of improvement. From a valuation perspective, the overall market is still quite fully valued according to Goldman Sachs data, trading on a PE of around 15.5 times which is 5% above its 20-year average.
This publication is produced by the MLC Investment Policy Team and issued by MLC Wealth Management Ltd and its related companies and entities for the intended informational use by financial advisers. Whilst due care has been taken in preparing this report, Australian National Consulting, ANC Wealth and MLC does not warrant or represent that the information, opinions or conclusions contained in this report are accurate, reliable, complete or current. This report is general information only and has been prepared without taking into account an investor’s individual objectives, financial situation or needs. The report should not be taken to contain securities advice or recommendations. Past performance is no indication of future performance.