Investing in the current global economy

Collective global growth is generally in positive territory but with some interesting nuances. In our view, the recent economic data indicates that the epicentre of world growth is shifting towards the US, with indications of some lags, and even softness, out of China and Europe.

US interest rates continue to push higher although markets view a lag

The market view of future US Federal Reserve (Fed) tightening has again started to lag significantly behind the timeframe indicated by the Fed itself. In fact, it’s interesting to note that US personal consumption expenditures price inflation has hit the Fed’s target of two per cent for the first time since early 2017, when the index first hit that target in January and February – after not reaching that level since 2011. US company earnings growth for the next 12 months also looks robust, driven in part by the ‘great Trump-tax giveaway’.

The Reserve Bank of Australia (RBA) has indicated no desire to move interest rates

Here in Australia the RBA looks set to keep rates on hold in the medium term as our economy sputters, and in particular, the residential property market remains soft. Australian corporate earnings growth outlook is also not quite so robust as that of the US, however earnings growth is positive, and valuations do not appear extreme. Nevertheless, we should note that Australian wage growth outlook continues to disappoint.

From these observations, there are three key trends to keep an eye on for Australian investors

  1. The strength in the US economy, and inflation touching the Fed’s target level should allow them to continue to raise rates and unwind quantitative easing, keeping upward pressure on US rates.
  2. The combination of weak wage growth in Australia and a softening housing market will continue to steady the RBA’s hand in relation to raising local rates.
  3. Higher US interest rates and flat Australian interest rates should apply downward pressure on the Australian dollar (AUD).

Part of the weak outlook for Australian equities is driven by the large weighting of major banks in the index

This factor, in conjunction with the lower overall earnings growth outlook and high historic relative valuations (compared to international markets), have collectively subdued growth prospects. As has been the Investment Committee’s stance over recent quarters, current conditions and the imbalances of the index suggest that an active approach in Australian equities remains more appropriate.

None of the broad asset markets are demonstrating what we consider obvious good value

Accordingly, there is little ‘buffer’ in those values to help us weather geopolitical uncertainty and market volatility. Despite low Australian cash rates, we continue to advise holding a sensible weighting to cash or term deposits, to provide the buffer that current valuations do not.

This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward-looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.

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Patrick Broughton

Investment Committee Member

Patrick has 32 years of investment banking experience spanning over a broad range of financial markets, including equities, fixed income, hybrids and convertibles and foreign exchange.

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