Trumponomics and investment markets

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at the risks for investors from President Trump’s approach and policies.

The key points are as follows:

• So far President Trump has been positive for share markets but this year the focus is increasingly shifting to populist policies with greater risk for investors.
• The key risks to keep an eye on in this regard relate to trade conflict and the expanding US budget deficit, although the latter is more a risk for when the US economy next turns down. 
• However, the best approach for investors in relation to Trump is to turn down the noise given the often contradictory and confusing news flow he generates.

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Italy is a worry - but 3 reasons not to be concerned about an Itexit

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at the 3 reasons not to be concerned about an Itexit

The key points are as follow:

• A populist coalition government in Italy is negative for Italian assets. Lingering uncertainty about a push for Italy to exit the Euro is likely a negative for the Euro too, though an Itexit and a Euro break up remain unlikely.

• Eurozone shares are likely to be relative outperformers globally thanks to more attractive valuations than the US, easier monetary policy and a falling Euro.

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After the Australian household debt and east coast housing booms – interest rates on hold until 2020

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at after the Australian household debt and east coast housing booms.

The key points are as follow:

• The RBA has left interest rates on hold for 21 months.
• A rate hike is now unlikely until 2020: as growth is likely to remain weaker than the RBA expects; wages growth and inflation are likely to remain low for longer; bank lending standards are tightening further, and; house prices in Sydney and Melbourne are falling with more downside ahead. In fact, raising rates at time of falling house prices could be dangerous.
• For investors: bank deposits will continue to offer poor returns; Australian bonds offer better returns relative to global bonds; and remain wary of the $A.

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Correction time for shares?

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at the recent correction.

The key points are as follow:

• The US share market is long overdue a decent correction. This now appears to be unfolding and may have further to go as higher inflation, a slightly more aggressive Fed and higher bond yields are factored in.
• This will impact most share markets including Australian shares.
• However, in the absence of an aggressive 1994 style back-up in bond yields or a US recession – neither of which we expect - the pull back in shares should be limited in depth and duration to a correction (with say a 10% or so fall) and shares should have positive returns this year as a whole.
• However, it’s likely to be a more volatile year than last year.

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2018 – a list of lists regarding the macro investment outlook

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at a list of lists regarding the macro investment outlook in 2018.

The key points are as follow:

• 2018 is likely to remain good for diversified investors. The investment cycle still favours growth assets over cash and bonds. But expect more volatile and constrained returns as US inflation starts to turn up. 
• Watch US inflation, bond yields, President Trump, the Italian election, China, the Sydney and Melbourne property markets and global business conditions PMIs.

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Review of 2017, outlook for 2018 - still in the "sweet spot", but expect more volatility ahead

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at the review of 2017 and the outlook for 2018.

The key points are as follow:

• Despite the usual worry list, 2017 has been pretty good for investors as global growth and profits accelerated and central banks stayed benign as inflation stayed low. 
• The “sweet spot” combination of solid global growth and profits and yet low inflation and benign central banks is likely to continue in 2018. However, US inflation is likely to start to stir and the Fed is likely to get a bit more aggressive. Expect a gradual rise in bond yields and a rising US dollar. The RBA is unlikely to start hiking rates until late 2018 at the earliest.
• Most growth assets are likely to trend higher, but expect more volatility and more constrained returns. Australian shares are likely to remain laggards.  
• The main things to keep an eye on are: the risks around Trump; inflation, the Fed and the $US; bond yields; the Italian election; China; and Australian property prices.

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Why cautious optimism is better for your investment health than perma pessimism ?

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at why cautious optimism is better for your investment health than perma pessimism.

The key points are as follow:

• Worries about an imminent financial crisis remain high. Australians seem particularly negative about the year ahead.
• However, the global economy is the strongest it’s been in years.
• More fundamentally, cautious optimism is essential if you wish to succeed as an investor.

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Will technology destroy jobs and inflation?

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at whether technology will destroy jobs and inflation.

The key points are as follow:

• Fear of machines taking human jobs is nothing new. But what is now different is the ability of machines to replicate human cognitive skills across many industries, rather than just in manual industries (like in manufacturing).
• The adoption of new technology won’t destroy the need for human jobs and cause a mass surge in unemployment. Technology will make some jobs obsolete but it will create others in its place. But, technological changes will further distort the labour market by putting pressure on middle-skill routine jobs and incomes. Non-routine cognitive and manual jobs will grow in importance as populations age and advanced economies become more service-based.
• Technological improvements are a long-run factor behind lower inflationary pressures. But, impacts on inflation from machine learning (the latest tech novelty) is still too early to be seen. Inflation is mainly being kept down by a slower than expected recovery to stronger GDP growth after the Global Financial Crisis.
• The government has a role to play to monitor the social impacts of technology and to ensure that the right education and training is being provided to the population so that there is flexibility in skills retraining and labour mobility.

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The medium term investment return outlook remains constrained

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at the medium term investment return outlook which remains constrained.

The key points are as follow:

• A further fall in investment yields across most major asset classes points to a constrained medium term return outlook. For a diversified mix of assets, this has now fallen to around 6.5% on our projections.
• For investors the key remains to: have realistic return expectations; allow that inflation is also low so real returns aren’t down as much; focus on asset allocation and focus on assets with decent & sustainable income.

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Where are we in the global investment cycle and what’s the risk of a 1987 style crash?

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at the global investment cycle and the risk of a 1987 style crash.

The key points are as follows:

• There is still little sign of the sort of excesses that precede major economic downturns and major bear markets suggesting that (although US shares are overdue a decent correction) we are still a fair way from the top in the investment cycle. Key to watch will be rising inflation and aggressive monetary tightening.
• The current environment around share markets is very different to 1987.

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Will Australian house prices crash? Five reasons why its more complicated than you think!

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at five reasons why its more complicated than you think.  

The key points are as follows:

• Talk of a property crash is likely to ramp up again with signs that the Sydney and Melbourne property markets are cooling. But the Australian property market is a lot more complicated than the crash calls suggest.
• We continue to expect a 5-10% downswing in Sydney and Melbourne property prices but a crash is unlikely and other capital cities will perform better.
• It remains a time for property investors to exercise caution and focus on laggard or higher-yielding markets.

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Another five great charts on investing

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note looks at another five great charts on investing.

The key points are as follows:

• At its core, successful investing is simple, but we have a knack of making it look complex.
• Here are another five great charts that help illuminate key aspects of investing: the importance of time in the market relative to timing; the case to look at your investments less; the relationship between risk and return; the importance of diversification; and the role of property.

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The Australian economy bounces back - five reasons why some further pick up is likely

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note takes a look at the rebound in the Australian economy seen in the June quarter and the outlook. 

The key points are as follows:

• Australian growth bounced back in the June quarter helped by consumer spending, investment and trade.
• There is good reason to expect growth to pick up further going forward: the drag from mining investment is fading, non-mining investment is looking better, public investment is strong, trade is adding to growth and profits are rising again. But growth is likely to be constrained around 2.5-3% and underlying inflation is likely to remain low.
• Expect the RBA's cash rate to remain low for a while yet and Australian shares to move higher by year end, but to continue underperforming global shares.

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The Global Financial Crisis 10 years on- Lessons learned and can it happen again?

It seems momentous things happen in years ending in seven. Well, at least in the last 50 years starting with the “summer of love” in 1967 and the introduction of the Chevrolet Camaro. 

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