Market update: Spring 2017

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Market update Spring 2017

ClearView investment analyst Jessica Schlosser looks at what happened in global markets in the June quarter and considers the outlook for Australian shares.

Global markets felt the impact of political uncertainty in the June quarter. In Europe, the election of French president Emmanuel Macron and the strong performance of Angela Merkel’s Christian Democratic Union in German elections helped ease concerns of a spreading populist antiglobalisation movement.

During the quarter, the MSCI Europe Index rose 7.4 per cent, supported by subsiding political risk, improved corporate earnings and a stronger economic backdrop.

Brazil’s economic recovery also hit a road bump with the country’s long running political corruption scandal embroiling President Temer.

In Asia, North Korea’s nuclear missile program continued to cause tension although it’s not expected to affect equity markets as long as the US and China continue to cooperate on the matter. While the Chinese share market rose 6 per cent in the quarter, China is increasingly conscious of its financial fragility due to the country’s high corporate debt and the government’s links to their corrupt shadow banking system.

In the United States, Congress’ inability to make meaning fiscal changes – demonstrated by its decision to push big infrastructure spending and tax reform out to 2018 – has led to support for the Trump administration declining. While the chance of a US stock market crash is minimal, US equities remained overvalued as at June 30, 2017 and face a potential correction.

Outlook for Australian shares

Fortunately, Australia hasn’t been affected by the global political uncertainty surrounding the Brexit fallout. However, questions about the direction of the Australian economy are emerging. The minor iron ore rally in the second half of the 2016 calendar year helped push the domestic share market higher but iron ore prices have since come down due to growing stockpiles in China. Furthermore, domestic construction activity is beginning to slow.

Weak wage growth continues to be a concern, especially given the increasing cost of essential services like electricity and gas. This, combined with rising interest rates and tighter credit conditions, leaves Australians at risk of a credit and cash flow crunch.

Still, Australia has an extremely resilient economy. It has recorded 103 consecutive quarters without a recession. Australia now holds the record for the longest run of uninterrupted growth in the developed world, according to the Australian Bureau of Statistics.

The economy’s adjustment to the end of the mining boom in 2013 is largely attributable to a weaker Australian dollar which supports exports and tourism, and makes Australia a more attractive destination for foreign students. New South Wales and Victoria have picked up some of the slack by increasing investment in non-mining industries by 10 per cent annually, while immigration has contributed to population growth and consumer demand.

That said, the Australian government and Reserve Bank of Australia appear to be running out of options to boost the economy. They managed to avoid the GFC by introducing various stimulus packages but these packages cost the government dearly and that burden is still evident. Further stimulus in the event of a downturn is unlikely. On top of that, taking the cash rate below 1.5 per cent will have minimal impact, evidenced by the impact in Europe which has had negative rates for some time.

While the Australian economy may be able to stave off a correction with continued immigration and expansion of non-mining industries, there are concerns it may be a case of delaying the inevitable.

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