Outlook: Shane Oliver

The Aussie sharemarket is likely to underperform its global peers

From around May to September/ October, I normally feel a bit nervous about the risk of a pullback in shares. The old saying “sell in May and go away and come back on St Leger Day” is really stuck in my mind.

Most major sharemarket falls have occurred in this period, including those of 1929 and 1987 and during the worst of the GFC. What’s more, shares have had good gains from “bear market” lows in February last year and as usual there is no shortage of calls for the next crash.

However, while it’s been a case of so far so good for global shares, which have been underpinned by good economic and profit news, we appear to be going through another bout of uncertainty regarding the Australian economy. The good news is that the economy grew again in the March quarter, taking us to an impressive 103 quarters without a recession. However, growth has slowed to a crawl and the wariness around Australia is threefold:

First, the boost to national income from a rebound in iron ore and other commodity prices has now in large part reversed.

Second, the housing boom looks to be over, with a peak in building approvals pointing to slowing housing construction and increasing signs we have seen the top in Melbourne and Sydney home prices, at least in terms of momentum.

Finally, the consumer is being constrained by record low wage growth, high under-employment and a likely fading of wealth effects as the housing boom fades.

These forces are weighing on resources, bank and consumer shares, with a “fear of Amazon” also impacting the latter.

Fortunately, the drag from falling mining investment is fading, public capital spending is rising strongly and net export volumes should return to boosting growth beyond the disruption from cyclone Debbie. As a result a recession is unlikely. And in the absence of a continuing apartment supply surge, much higher interest rates and/or much higher unemployment, a 5%-10% cyclical downturn in average property prices is far more likely than a 20%-plus crash.

But the drags referred to above mean Australian growth is likely to remain mediocre and well below the 3% that the Reserve Bank and federal government are assuming.

This means the risks are skewed towards another Reserve Bank rate cut later this year, a resumption in the downtrend in the $A taking it below US70¢ and a continuation of the relative underperformance of Australian shares compared with global shares.

Key indicators to watch locally over the next month include employment growth, retail sales and home price data as a guide to whether the Reserve Bank can, and will, cut rates again. Globally, risks around President Trump in relation to the FBI/Russia probe versus progress in terms of cutting taxes and infrastructure spending, North Korea and prospects for an early Italian election are all worth keeping an eye on as potential drivers of a short-term seasonal pullback in shares.

But notwithstanding short-term uncertainties, the combination of reasonable valuations in most sharemarkets, global growth and profits looking good and global monetary conditions remaining supportive means that the broad trend in shares is likely to remain up. This includes the Australian sharemarket. It’s just that it is likely to remain a relative underperformer compared with global shares.