Outlook: George Lucas

Improving growth in Australia and overseas should underpin equity markets

The reason rates are rising is because growth is better than expected

As the weather cools off, and we complain about having to chuck on a light jumper at night, it’s easy to see how we Australians are pretty spoilt, and it’s not just with the climate …

Our economy has beaten the Netherlands’ record for the longest spell without a recession, currently sitting on a 102-quarter streak. We’re enjoying a rebound in commodity prices, not only benefiting our resource-heavy index but also impacting our deficit and reflecting a renewed strength in the global economy. We continue to defy expectations with our employment market, which is stronger than most forecasts last year across a number of sectors. Despite being denied your weekend swim, there is reason for us to be optimistic as we approach winter!

This improvement in growth isn’t just occurring in Australia but is a trend we’re seeing in Europe, emerging markets like China and India, and the US. It is a key theme for 2017 and should provide ongoing support to the equity markets. Another is the expectation of a stronger US dollar against the yen, the euro and many emerging market currencies. This should see a boost to corporate earnings in many of these countries, which will also provide underlying strength to equity markets.

Much of the past six months has focused on the US market and economy but it has been emerging markets that have led the charge in the performance of equities. But as always after a long run, the bears start to rear their heads and question how long it can last. There has been a lot of talk about how the S&P 500, the main benchmark for the US markets, may be overvalued. We do not think this is the case, though it does not look cheap.

It is important to remember that the models used to determine the value of an index are based on historical data, and while this may be a predictor of the future, it does not factor in current factors such as the very low interest rate environment and the rapidly changing technological landscape.

The make-up of market indices today is not only vastly different from 20 years ago; it’s vastly different to what it was five years ago. Given it is the tech giants – Apple, Amazon, Alphabet – driving growth of the S&P 500, we believe that these models are underestimating the impact that new technology is having on economic growth. As we get used to developing countries such as India, China and Brazil having population-wide access to the latest technology, we will begin to see why our value models for the past 20 years have become outdated.

There are always risks. European political uncertainty continues to grab the headlines but it may be overstated. Last year taught us to never rule out a surprise like Brexit and the right-wing parties in the Netherlands and France which were expected to disrupt EU member states. But so far they have had far less penetration than expected, which should calm the market.

There is also the risk that interest rates will rise faster globally than expected as economies recover. But there is a flipside to this, and the reason they are rising is because economic and employment growth is also better than expected.

So it is not a slam dunk that the upside interest rate surprise will be a major negative for sharemarkets.

You won’t hear anybody shouting about it but European economic growth was similar to Australian growth over the past year and there is reason for more optimism.