AMP Capital View March 2017

Investment markets and key developments from over the past week

The past week saw US shares rise 0.7%, European shares gain 2.6% and Japanese shares rise 1% helped by strong US forward looking data, signs that the US Federal Reserve is increasingly confident in the US outlook and confidence that President Trump is in on track with his pro-business agenda. By contrast Australian shares fell 0.2% and Chinese shares fell 1.3%.

Despite much anticipation, President Trump’s Congressional address provided little detail on his pro-business policies but he made plenty of references to deregulation, corporate and personal tax cuts and infrastructure spending and he sounded more presidential. As a result share markets remained happy. Interestingly the Trump Administration also sent to Congress its trade policy agenda which made reference to pursuing bilateral trade deals and renegotiating existing deals but does not signal the widespread application of tariffs, which adds confidence to the view that a trade war will be avoided.

Local impact

Shares remain vulnerable to a pull back as short term investor sentiment towards them is currently very bullish, the US Federal Reserve is getting a bit more aggressive, President Trump related uncertainty remains and various European elections could create nervousness in coming months.

However, we see share markets trending higher over the next 12 months helped by ok valuations, continuing easy global monetary conditions, fiscal stimulus in the US, some acceleration in global growth and rising profits.

Still low yields and capital losses from a gradual rise in bond yields are likely to see low returns from bonds. Australian bonds are preferred to global bonds reflecting higher yields and the fact that the Reserve Bank of Australia is well behind the US Federal Reserve in raising rates.

Commercial property and infrastructure are likely to continue benefitting from the ongoing search for yield, but this demand will wane as bond yields trend higher over the medium term.

National residential property price gains are expected to slow to around 3-4% this year, as the heat comes out of Sydney and Melbourne and rising apartment supply hits.

Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.5%.

The Australian dollar could still see a retest of US$0.78 which if broken would likely see a run up to US$0.80. However, the downtrend in the Australian dollar from 2011 is likely to resume at some point this year as the interest rate differential in favour of Australia narrows (as the US hikes three or four times and the Reserve Bank of Australia remains on hold).

Further insight can be found at:

Source: AMP Capital, March 2017:

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