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Author: Provision Wealth

Review of 2017, outlook for 2018 – still in the “sweet spot”, but expect more volatility ahead

Date: Dec 07th, 2017

2017 – a relatively smooth year

By the standards of recent years, 2017 was relatively quiet. Sure there was the usual “worry list” – about Trump, elections in Europe, China as always, North Korea and the perennial property crash in Australia. And there was a mania in bitcoin. But overall it has been pretty positive for investors:
 
  • Global growth continued the acceleration we had seen through the second half of last year. In fact, global growth looks to have been around 3.6%, its best result in six years, with most major regions seeing good growth. Solid global growth helped drive strong growth in profits.

  • Benign inflation. While deflation fears faded further, underlying inflation stayed low and below target, surprising on the downside in the US, Europe, Japan and Australia. 

  • Rising commodity prices. Better than feared global demand and a surprise fall in the $US helped commodity prices along with constrained supply in the case of oil.

  • Politics turned out to be benign. Political risks featured heavily in 2017 but they turned out less threatening than feared: while political risk around Trump rose with the Mueller inquiry into his presidential campaign’s Russian links, business-friendly pragmatism dominated Trump’s first-year policy agenda and a trade war with China did not eventuate; Eurozone elections saw pro-Euro centrists dominate; North Korean risks increased but didn’t have a lasting impact on markets; Australian politics remained messy but arguably no more so than since 2010.

  • Another year of easy money. While the Fed continued to gradually raise interest rates and started reversing quantitative easing and China tapped the monetary brakes, central banks in Europe and Japan remained in stimulus mode and overall global monetary policy remained easy. 

  • Australia had okay growth hitting 26 years without a recession, but inflation remained below target. While housing construction started to slow and consumer spending was constrained, non-mining investment improved, infrastructure spending surged & export volumes were strong. Record low wages growth and low inflation kept the Reserve Bank of Australia (RBA) on hold, though.

    The “sweet spot” of solid global growth and low inflation/benign central banks helped drive strong investment returns overall.


Yr to date to Nov. Source: Thomson Reuters, Morningstar, REIA, AMP Capital

  • Global shares pushed sharply higher supported by strong earnings, low interest rates and growing investor confidence. While Eurozone, Japanese and Australian shares saw 5-7% corrections along the way, US shares only saw brief 2-3% pullbacks. So volatility was very low.

  • The big surprise was that the US dollar fell rather than rose as low inflation kept expectations for Fed rate hikes depressed. This helped boost US shares but dragged on Eurozone shares as the Euro rose.  

  • Asian and emerging market shares were star performers thanks to leverage to global growth, rising commodity prices and a weaker $US, which reduced debt servicing costs.  

  • Australian shares had good returns but were relative laggards as has generally been the case this decade with weaker underlying profit growth. 

  • Bonds had mediocre returns. While inflation surprised on the downside, ultra-low yields constrained returns. 

  • Real estate investment trusts had a somewhat constrained year as investors remained a bit wary of listed yield plays.

  • Unlisted commercial property and infrastructure continued to do well as investors sought their still relatively high yields.

  • Australian residential property returns slowed as the heat came out of the Sydney and Melbourne property markets.    

  • Cash and bank term deposit returns were poor reflecting record low RBA interest rates. 

  • Reflecting US dollar softness, the $A actually rose helped by modest gains in commodity prices. 

  • Reflecting strong returns from shares and unlisted assets, balanced superannuation fund returns were strong.

2018 – looking ok but expect more volatility

2018 is likely to remain favourable for investors, but more constrained and volatile. The key global themes are likely to be: 
  • Global growth to remain strong. Global growth is likely to move up to 3.7%, ranging from around 2% in advanced countries to around 6.5% in China, with the US receiving a boost from tax cuts. Leading growth indicators such as business conditions PMIs point to continuing strong growth, but just bear in mind that they don’t get much better than this. Overall, this should mean continuing strong global profit growth albeit momentum is likely to peak.


Source: Bloomberg, IMF, AMP Capital

  • US inflation starting to lift. Global inflation is likely to remain low, but it’s likely to pick up in the US as spare capacity is declining, wages growth is picking up and as higher commodity prices feed through. We don’t expect a surge and the flow through in other major countries will be gradual. But higher US inflation may disrupt the yield trade at times and cause some nervousness.

  • Monetary policy divergence to continue. The Fed is likely to hike four times in 2018 (which is more than markets are allowing) and to continue with quantitative tightening but other central banks are likely to lag.• Political risk may have more impact after a relatively benign 2017. US political risk is likely to become more of a focus again (with the Mueller inquiry getting closer to Trump, the November mid-term elections likely to see the Republicans lose the House and the risk that Trump may resort to populist policies like protectionism to shore up his support), the Italian election is likely to see the anti-Euro Five Star Movement do well (albeit not well enough to form government), North Korean risks are unresolved and there is the risk of an early election in Australia. 

Fortunately, there is still no sign of the sort of excesses that drive recessions and deep bear markets in shares: there has been no major global bubble in real estate or business investment; there is the bitcoin mania but not enough people are exposed to that to make it economically significant globally; inflation is unlikely to rise so far that it causes a major problem; share markets are not unambiguously overvalued and global monetary conditions are easy. So arguably the “sweet spot” remains in place, but it may start to become a bit messier. p  

For Australia, while the boost to growth from housing will start to slow and consumer spending will be constrained, a declining drag from mining investment and strength in non-mining investment, public infrastructure investment and export volumes should see growth around 3%. However, as a result of uncertainties around consumer spending along with low wages growth and inflation, the RBA is unlikely to start raising interest rates until late 2018 at the earliest. 

Implications for investors

Continuing strong economic and earnings growth and still-low inflation should keep overall investment returns favourable but stirring US inflation, the drip feed of Fed rate hikes and a possible increase in political risk are likely to constrain returns and increase volatility after the relative calm of 2017:  

  • Global shares are due a decent correction and are likely to see more volatility, but they are likely to trend higher and we favour Europe (which remains very cheap) and Japan over the US, which is likely to be constrained by tighter monetary policy and a rising US dollar. Favour global banks and industrials over tech stocks that have had a huge run.

  • Emerging markets are likely to underperform if the $US rises as we expect.

  • Australian shares are likely to do okay but with returns constrained to around 8% with moderate earnings growth. Expect the ASX 200 to reach 6200 by end 2018. 

  • Commodity prices are likely to push higher in response to strong global growth. 

  • Low yields and capital losses from a gradual rise in bond yields are likely to see low returns from bonds.

  • Commercial property and infrastructure are likely to continue benefitting from the ongoing search for yield by investors. 

  • National capital city residential property price gains are expected to slow to around zero as the air comes out of the Sydney and Melbourne property boom and prices fall by around 5%, but Perth and Darwin bottom out, Adelaide and Brisbane see moderate gains and Hobart booms. 

  • Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.2%.

  • The $A is likely to fall to around $US0.70, but with little change against the Yen and the Euro, as the gap between the Fed Funds rate and the RBA’s cash rate goes negative.

What to watch?

The main things to keep an eye on in 2018 are: 
  • •The risks around Trump – the Mueller inquiry and the mid-term elections. We don’t see the Republicans impeaching Trump (unless there is evidence of clear illegality) but he could turn to more populist policies such as a trade war with China, a spat over the South China Sea or a clash with North Korea to boost his support.

  • How quickly US inflation turns up – a rapid upswing is not our base case but it would see a more aggressive Fed, more upwards pressure on the $US, which would be negative for US and emerging market shares and a rapid rise in bond yields.

  • The Italian election – the anti-Euro Five Star Movement is likely to do well and, even though it’s hard to see them being able to form government, this could cause nervousness; 

  • Whether China post the Party Congress embarks on a more reform-focussed agenda resulting in a sharp decline in economic growth – unlikely but it’s a risk.

  • Whether non-mining investment, infrastructure spending and export volumes are able to offset constrained consumer spending and a downturn in the housing cycle and how far Sydney and Melbourne property prices fall.

 

Source: AMP Capital 7 December 2017

Author: Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

Monetary Policy Decision – Statement by Philip Lowe, RBA Governor, December 2017

Date: Dec 05th, 2017

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

Conditions in the global economy have improved over 2017. Labour markets have tightened and further above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy continues to be supported by increased spending on infrastructure and property construction, although financial conditions have tightened somewhat as the authorities address the medium-term risks from high debt levels. Australia’s terms of trade are expected to decline in the period ahead but remain at relatively high levels.

Wage growth remains low in most countries, as does core inflation. In a number of economies there has been some withdrawal of monetary stimulus, although financial conditions remain quite expansionary. Equity markets have been strong, credit spreads have narrowed over the course of the year and volatility in financial markets is low. Long-term bond yields remain low, notwithstanding the improvement in the global economy.

Recent data suggest that the Australian economy grew at around its trend rate over the year to the September quarter. The central forecast is for GDP growth to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved further, with the forward-looking indicators being more positive than they have been for some time. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.

Employment growth has been strong over 2017 and the unemployment rate has declined. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead. There are reports that some employers are finding it more difficult to hire workers with the necessary skills. However, wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time.

Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. The Bank’s central forecast remains for inflation to pick up gradually as the economy strengthens.

The Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

Growth in housing debt has been outpacing the slow growth in household income for some time. To address the medium-term risks associated with high and rising household indebtedness, APRA has introduced a number of supervisory measures. Credit standards have been tightened in a way that has reduced the risk profile of borrowers. Nationwide measures of housing prices are little changed over the past six months, with conditions having eased in Sydney. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities.

The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Source: Reserve Bank of Australia, December 5th, 2017

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How to have a budget friendly holiday this summer

Date: Nov 30th, 2017

Holidays usually equal good times, but they don’t have to equal big money. 

Everyone loves saving a dollar or two, and one place it really pays to stretch your money further is on holidays. After all, the more cost effective your holidays are, the more of them you can afford to have!

If you’re still searching for a destination to escape to this summer, we’ve got some suggestions below that won’t break the bank, plus some smart money saving tips whatever your holiday budget.

Holidays close to home

You don’t have to travel miles from home to get that carefree holiday feeling. We’re lucky enough to be blessed with some pretty spectacular scenery here in Australia, and also some pretty fabulous summer weather.

Jumping in the car and heading a few hours away, either to the coast for a beach holiday, camping for a national park adventure, or to your nearest capital city for a city break all offer their own rewards.

Travel by car cuts the cost of your holiday, but to stretch your money even further, choose self-catering accommodation through sites such as Airbnb so you can save more by cooking some meals for yourself too.

Another option:

For another idea closer to home (and even cheaper) consider a staycation – where you stay at home, but live like you’re on holiday. Think eating out at local restaurants you haven’t had the time to try, getting a massage, going to the movies, and visiting local tourist attractions.

Holidays around Australia

The number of easily accessible Australian destinations continues to grow as budget airlines like Tigerair and Jetstar expand their flight routes. And it’s not just the capital cities you can fly to on the cheap, but major tourist destinations like Uluru, the Gold Coast and the Whitsundays.

If you’d like to explore somewhere different, you can also find inexpensive flights to lesser known local destinations like Townsville, Newcastle, or Launceston, depending on where you live.

One advantage of visiting regional cities or some of Australia’s smaller capital cities, such as Hobart, Adelaide and Canberra, is that the on the ground costs – think accommodation, eating out, attractions – are often lower than Sydney or Melbourne prices.

The key to getting the best flight deals is to keep an eye out for special offers and be flexible – both on when you fly and where you go.

Another option:

Another idea for a good-value Australian holiday is a short cruise. While some short cruises travel between destinations such as Melbourne and Sydney, others, called sampler cruises, depart from, and return to, the same port.  In the case of a cruise the travel is part of the holiday, and the all-inclusive nature, with food and entertainment included, can make them good value. For more information, check out Royal CaribbeanCarnival or P&O.

Holidays overseas

Destinations like Fiji, Bali and other parts of the Pacific Islands and South East Asia are popular with Australian’s looking to holiday overseas – and for good reason.

With budget airlines flying to these destinations, favourable exchange rates and lower costs of living compared to Australia, you can certainly get bang for your buck in destinations such as these, though they may not be as cheap as they once were.

Also on the pocket-friendly list, a destination which offers affordability and plenty of variety is New Zealand.

Another option:

For other overseas destinations it pays to keep an eye on currency exchange rates. Destinations you may have though out of reach on a tight budget, such as the US, become much more affordable when the Australian dollar is high against the US dollar. And if you can be flexible with timing, travelling in the off-season or shoulder seasons can also help you grab a bargain.

Source : AMP 20 November 2017 

This article provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person..

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

Date: Nov 30th, 2017

At the start of last year, with global and Australian shares down around 20% from their April/May 2015 highs, the big worry was that the global economy was going back into recession and that there will be another Global Financial Crisis (GFC). Now, with share markets having had a strong run higher, it seems to have been replaced by worries that a crash is around the corner and this will give us the global recession and new GFC that we missed last year!

Australians seem particularly vulnerable to worries these days. On the weekend I read that Australians are suffering from an “epidemic of anxiety” and that out of a survey of 24 nations Australians ranked in the upper half in terms of worries about a health epidemic (9th highest), a terrorist attack (8th highest) and a nuclear attack (5th highest) – way above South Korea in terms of the latter despite Kim Jong-un’s new found nuclear capability just across the border! And a Roy Morgan survey has found that only 31% of surveyed Australians expect next year to be a better year than 2017, which is the lowest on record and only just above the 30% who expect next year to be worse. See the next chart.


No survey results for 1996, 2010-2016, Source: Roy Morgan, AMP Capital

In fact, it’s the lowest net balance of “better” less “worse” expectations for the year ahead since Australia was in the midst of the last recession in 1990. Whatever happened to the “she’ll be right” approach? Surely it’s not that bad!

At a broader global level, there seems to be a never ending worry list which since the GFC has rolled on through worries about a new collapse in the US (on the back of too much debt, hyperinflation on the back of money printing, deflation after the hyperinflation failed to materialise, a slump when monetary stimulus ends, or whatever), to worries the Eurozone will blow (or vote) itself apart, to worries that China will collapse as a result of too much debt and/or a property crash, interspersed by worries about the emerging world, Ebola, Ukraine, deflation, North Korea and various elections including the advent of President Trump along the way. And of course, the worries about Australia collapsing keep rolling on with the focus switching from a commodity crash to a housing crash.

Despite this ongoing worry list, investment returns have generally been good. Most assets have had good returns over the last year and the last five years, and balanced growth superannuation funds after fees and taxes returned an average 8.2% over the year to September and 9.3% per annum over the last five years.

So why the persistent gloom?

Some might argue that post the GFC, the world is now a more negative place and so gloominess is understandable today. But given the events of the last century – ranging from flu pandemics, the Great Depression, several major wars and revolutions, numerous recessions and financial panics – it’s doubtful that this is the case.

More fundamentally, it’s well known that humans are naturally attracted to bad news stories. The evolution of the human brain through the Pleistocene age where the trick was to dodge woolly mammoths and sabre toothed tigers means that much more space in our brains is devoted to threat than reward. This means that we are constantly on the lookout for risks and so more disposed to check out bad news stories as opposed to good news. In the investment world, an outcome of this is known as “loss aversion” in that a financial loss is felt far more keenly than a same-sized gain. As a result, doomsters are far more likely to be seen as deep thinkers than optimists and “bad news sells”.

But there is nothing new here. What has changed is the flow of information from a trickle to an avalanche. This is the case everywhere and the investment world is not immune. As the well-known US stock picker Peter Lynch observed “stock market news has gone from hard to find (in the 1970s and early 1980s), then easy to find (in the late 1980s), then hard to get away from”. This can be great in a way, but it can also just add to confusion.

But more significantly, the information age has led to not just greater access to information but also an explosion of media begging for attention. And in the scramble to get me and you to tune in, bad news and gloom beats good news and balance. I just have to swipe right (no, not Tinder!) on my smart phone to see an updated list of links to bad news stories and celebrity gossip (but rarely anything positive!).

Arguably, the political environment has added to this in some countries with politicians becoming more polarised to the left and the right and more willing to scare the electorate into supporting them.

Despite the improvement in the global economy over the last year, Google the words “the coming financial crisis” and you’ll still get 49.3 million search results including such gems as:

  • “The next financial crisis is coming ‘with a vengeance’.”

  • “The next financial crisis is coming, I just don’t know when.”

  • “Financial crisis coming by end 2018: Prepare urgently.”

  • “Trump can’t stop the next financial crisis.”

  • “It’s a scary time with a global crisis on the way.”

  • “Major crisis coming, bigger than 2008 financial crisis.”

And on and on.

Of course, people have always been making such predictions of imminent disaster – my favourite was Ravi Batra’s The Great Depression of 1990, which didn’t happen so it morphed into The Crash of the Millennium, which saw an inflationary depression that didn’t happen either.  It’s just that it’s now a lot easier and cheaper to access it and be scared by it.

So with all the talk of another global financial crisis and some sort of collapse in Australia, it’s not that surprising that people are apprehensive and Australians are less positive about the future. 

But the world is actually looking good

While all countries have their challenges, the global economy is in its best shape in years:

  • After years of downgrading its global growth forecasts, the IMF has been revising them up this year.


Source: IMF, AMP Capital

  • Global profits are up around 15% over the last year.

  • Unemployment has been falling virtually everywhere (except Japan where it’s just 2.8%!).

And while Australia could be doing a lot better and is not without its issues (notably around record low wages growth, high underemployment, expensive housing and high household debt), the economy has managed to keep growing despite the mining investment boom going bust and should benefit from stronger global growth and the end of the drag from falling mining investment. All of which should be able to keep it growing, albeit we don’t see strong enough growth or inflation for the RBA to start raising rates for a while yet.

The case for optimism as an investor

Dr Don Stammer – a doyen of Australian economists and investing – has said there are six things we owe our children or grandchildren: a sense of humour; a reasonable education; an early understanding of the magic of compounding; an awareness the cycle lives on; some help when they buy their first house or apartment; and a feeling of optimism. I completely agree.  I have written lots on the importance of compounding and the cycle but I think a degree of optimism is essential if you wish to succeed as an investor.

Benjamin Graham once said: “To be an investor you must be a believer in a better tomorrow.” If you don’t believe the bank will look after your term deposits, that most borrowers will pay back their debts, that most companies will see rising profits over time, that properties will earn rents etc then there is no point investing. This is flippant but true – to be a successful investor you need a favourable view of the future.

Of course this does not mean blind optimism where you get sucked in with the crowd when it becomes euphoric or into every new whiz bang investment obsession that comes along (with bitcoin the latest in a long list of manias that goes back to Dutch tulip bulbs and includes the dot com stocks of the late 1990s). If an investment looks and feels too good to be true and the crowd is piling in, then it probably is… particularly if the main reason you are buying in is because of huge recent gains and their extrapolation off into to the future. So the key is cautious optimism, not blind optimism.

But when it comes to conventional investments like shares, since 1900 shares in the US have had positive returns around seven years out of ten and in Australia it’s around eight years out of ten. So getting too hung up in permanent pessimism on the next financial crisis and when it will come and what will on the basis of history inevitably drive the market down in the two or three years out of ten may mean missing out on the years it rises.

 

Source: AMP Capital 29 November 2017

Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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