Shane Oliver

Global growth is strong but the lo­cal econ­omy seems des­tined to re­main sub­dued

Money Magazine Australia - - CONTENTS - Shane Oliver is chief econ­o­mist and head of in­vest­ment strat­egy at AMP Cap­i­tal. Shane Oliver

It’s of­ten said that share­mar­kets climb a wall of worry. That’s cer­tainly been the case this year as the worry list has seem­ingly ex­panded (from the Fed to Trump’s tar­iffs, Italy and Aus­tralian prop­erty prices) and volatil­ity has in­creased, and yet share­mar­kets have trended higher.

Our as­sess­ment is that the trend in share­mar­kets will re­main up. The big pos­i­tives are that global growth is strong but we are not see­ing the signs of ex­cess (such as surg­ing in­fla­tion and over-in­vest­ment) that pre­cede re­ces­sions and ma­jor bear mar­kets. This is un­der­pin­ning strong profit growth at a time when shares, while no longer cheap, are not par­tic­u­larly ex­pen­sive ei­ther and global mon­e­tary con­di­tions are still easy.

How­ever, there are a few storm clouds glob­ally that warn of volatil­ity at least. In par­tic­u­lar, the US econ­omy has lit­tle spare ca­pac­ity and in­fla­tion­ary pres­sures are build­ing. As a re­sult, the Fed is con­tin­u­ing the steady drip-feed of rate hikes. Trade war risks be­tween the US and China con­tinue to build, and this in turn is putting pres­sure on Chi­nese growth. US po­lit­i­cal risks are in­creas­ing – no­tably around the Mueller in­quiry and the mid-term elec­tions – and risks around Italy re­main.

In this re­gard there are sev­eral things to keep an eye on glob­ally over the next month.

The trade war threat risks ramp­ing up with the US threat­en­ing tar­iffs on an­other $US200 bil­lion ($275 bil­lion) of im­ports from China after Septem­ber 5. How China re­sponds will be crit­i­cal.

The US Fed­eral Re­serve at its Septem­ber 25-26 meet­ing is likely to hike rates for the eighth time this cy­cle to a range of 2%-2.25% and will be watched for guid­ance as to how much fur­ther it will go. And Ital­ian bud­get ne­go­ti­a­tions risk tak­ing it into con­flict with the rest of Europe. Septem­ber and Oc­to­ber are also known for share­mar­ket weak­ness and volatil­ity.

In Australia, the glass re­mains half full or half empty de­pend­ing on your per­spec­tive. The huge slump in min­ing in­vest­ment is bot­tom­ing, non-min­ing in­vest­ment is pick­ing up, in­fra­struc­ture in­vest­ment is boom­ing and ex­port vol­umes are strong.

But against this, hous­ing con­struc­tion looks to have peaked and there is un­cer­tainty re­gard­ing the out­look for con­sumer spend­ing on the back of con­tin­u­ing high un­der-em­ploy­ment, poor wages growth and fall­ing house prices. Th­ese cross-cur­rents are likely to keep eco­nomic growth av­er­ag­ing around 2.5%3%, which is a bit less than the Re­serve Bank is ex­pect­ing. This points to on­go­ing spare ca­pac­ity in the econ­omy and rel­a­tively high un­der­em­ploy­ment which, along with fall­ing Syd­ney and Mel­bourne home prices, makes it very hard to see the Re­serve Bank rais­ing in­ter­est rates any time soon. Well, at least not un­til 2020 and it’s quite pos­si­ble the next move will be an­other cut.

Lo­cally, data for house prices (no­tably for Syd­ney and Mel­bourne), em­ploy­ment, re­tail sales and June quar­ter GDP are worth watch­ing through Septem­ber and early Oc­to­ber to see how this goes, although our lean­ing is to ex­pect more of the same.

The like­li­hood, though, is that with Aus­tralian eco­nomic growth re­main­ing sub-par, Aus­tralian shares will trend up but cap­i­tal growth is likely to be sub-par com­pared with global shares. And with the Fed con­tin­u­ing to hike and the RBA stay­ing on hold, the Australia dol­lar has more down­side ahead, prob­a­bly to around US70¢.

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