Investing outlook
››› THE BIG QUESTIONS FOR 2018
WHAT WILL BE THE STANDOUT SECTORS AND WHAT ISSUES DO INVESTORS NEED TO WATCH OUT FOR?
We see 2018 as a year of transition, away from the prolonged low-interest-rate environment that has only managed to support a debt-fuelled, overinflated housing sector and towards an environment of steady, broad-based growth. It has been quite some time since a changing interest rate cycle has come into play for guiding investment choices.
We see global growth being more supportive for Australia than at any time since the GFC. The US and Europe are expanding at an above-trend pace, the UK so far has avoided the worst of the Brexit-related fears of a protracted slowdown, and China has been expanding at a steady 6%-7% pace since 2014, in turn underpinning the strongest regional trade flows we’ve seen in years. All this adds up to a favourable environment for global equity investments, which in turn is a strong safety net for Australia’s outlook.
The conservative investor will be relieved to know that interest rates are expected to rise, albeit gradually, over 2018. After earning a 2.4% return in the past two years (Bloomberg AusBond Composite – that is, a con- servative domestic bond fund) we look for returns to be at least 2% higher over 2018 and into 2019, boosting the purchasing power of savers and retirees after years of barely keeping up with inflation.
The global policy mantra since the GFC has been to support debt and credit at the expense of, indeed punishing, the savers. With the US and Canada lifting interest rates over the past year or so, the tide is turning for other central banks to slowly withdraw the life support and take rates off the floor. We include Australia in that bucket. Another welcome policy shift is the push for infrastructure. This is a catchphrase for construction, anything from a new highway to a new airport. The states are planning to build highways, ports, sporting facilities, hotels, etc, after years of patching up worn-out facilities.
We therefore expect sectoral outperformance in the building materials industry for longer-term growth. This suggestion may contrast with headlines about house prices, particularly in apartments, falling dramatically, but this has been anticipated in the policy space for quite some time, and resources that were deployed for housing, and mining before, can turn to longer-term infrastructure projects that boost Australia’s growth and productivity prospects over the longer term.