Outlook: Hans Kunnen
This is the season for counting our blessings, even if they are modest
Ilike autumn! Reporting season is over and now the dividends flow. Mind you, unless you were overweight resources, the dividend flow will be much like it was last year.
After a year of modest economic growth, company earnings growth, ex-resources, was also modest. To be honest, the next six months seem set to deliver more of the same. But let’s be positive. Inflation is low, we still have franking credits and modest dividend growth is better than going backwards!
So what’s in store? There are a lot of good things happening in the
Australian economy.
Exports are on the rise, commodity prices are higher than expected, the agricultural sector is having its best year in decades, infrastructure spending is firm, home construction continues at high levels, inflation is low, unemployment is steady and new jobs are being created. All of this underpins corporate activity and the sharemarket. Low interest rates also support the market.
In the month ahead, budget speculation will emerge. Loss of our AAA credit rating, should that happen, would not assist market sentiment but it wouldn’t be the end of the world. If there are changes to negative gearing for property or changes to capital gains tax, the chances are that investors might move towards the sharemarket.
We will also get another read on inflation. It’s likely to be below 2%, which suggests that the Reserve Bank won’t lift its cash rate any time soon.
In light of the stable local economic news, investor attention could move offshore. The US economy continues to grow and sentiment will be further boosted by the foreshadowed corporate and personal tax cuts, plus potential infrastructure spending. Neither of these will happen overnight but the market is forward looking.
The news out of China should also be positive. It is cutting its output of lowgrade iron ore and seeking to buy highergrade ore on world markets. While further surges in iron ore prices seem unlikely, a collapse is not likely either. Chinese demand for Australian services (tourism and education) remains firm, as does the demand for agricultural products. All this supports our economy, property market and sharemarket.
There are also signs of muted recovery in Europe. If these pick up steam, it would give heart to international investors which could then flow into improved sentiment towards the Australian market.
You may have noticed that bond yields in Europe and the US have risen in recent months. While this can be a drag on share prices, it’s also a signal that the worst of “the great recession” is behind us. Most recently, the European Central Bank (ECB) lifted its forecasts for European economic activity. So what could go wrong? Further rate rises in the US, after last month’s 0.25% hike to 1%, could unsettle markets, as might a “far right” victory in the French elections. If Britain can leave the European Union, why not France? And then there’s Greece. Debts extended a few years ago will need repaying. Is another Greek tragedy just around the corner? I doubt it but we can’t rule it out.
Speaking of tragedies, the recent outpouring of protectionist rhetoric in the US does not bode well for markets. Trade disruption or geopolitical disruption, be it sourced in the US, Mexico, China or Europe, threatens to put a dampener on investor sentiment. Watch this space.
Having considered some potential nearterm risks, let’s finish on a positive note. The move towards higher interest rates in the US and possibly in Europe is a sign of improving health. In Australia, short-term interest rates seem set to remain low well into 2018. Even when they do rise it’s likely to be a gradual affair.
The outlook for corporate operating conditions in Australia remains broadly favourable and from that should flow reasonable earnings. Your autumnal dividend cheques are in the mail.
The outpouring of protectionist rhetoric does not bode well