An improving outlook for global growth and corporate earnings, along with improving business and corporate sentiment has pushed shares higher in 2017. Emerging markets shares also rebounded following a weak finish to 2016. In the U.S., this favourable backdrop and the continuing, albeit slowing, effects of the “Trump trade” helped major share market benchmarks reach record highs. Economic data from Europe was supportive, with the Eurozone economic expansion outpacing U.S. economic growth for the first time since 2008.
USA: Major US indices remain close to all-time highs. While corporate earnings remain sound valuations continue to trade above long-term averages. Some of the lustre has come off President Trump’s policies with many details remaining unknown. Economic data remains robust in the US.
China: China’s GDP growth target was set at around 6.5 per cent at the National People’s Party Congress in March. While we expect some moderation in growth momentum from recent policies targeting property, proactive fiscal policy further boosted by public-private partnerships will provide an offset ahead of the Communist Party Congress later in the year. Based on consensus earnings forecasts, the forward price-earnings ratio for Chinese shares sits below 13 times.
Europe & UK: Macro economic data is indicating an ongoing improvement in the Eurozone, however political uncertainty remains high with the upcoming French and German elections. The European Central Bank (ECB) kept monetary policy unchanged at its latest meeting, but there was a notable change in language to a less dovish stance. ECB President Mario Draghi recognised the improvement in the macro data and that the risks to the economic outlook are now less tilted to the downside, as well as there being less of a sense of urgency for the ECB to act.
With Article 50 now finally triggered, Britain will face tough negotiations ahead. Setbacks are likely, which could have detrimental effects on business sentiment and investment. At the same time, inflation keeps eating into consumers’ purchasing power, so household spending is unlikely to pick up in the near term.
Consensus earnings expectations remain positive for FY17, with the share market remaining on track to record some earnings growth for the first time in two years. Much of this has been driven by the commodity and base metal price recoveries in the resources shares. The outlook for many of the other sectors remains more muted.
The recent reporting season delivered a mixed bag in terms of company announcements. Bluescope and CSL both upgraded their FY17 earnings guidance, whilst at the other end of the spectrum, there were a string of profit warnings from the likes of Brambles. Telstra’s earnings also disappointed the market. The majority of production reports from the resources and energy sectors either met or exceeded market expectations.
Some caution is warranted around shares exposed to Brexit and those exposed to the Australian consumer as domestic discretionary spending appears to have slowed considerably over the past year.
Cash and Fixed Interest
The Reserve Bank of Australia (RBA) left the cash rate unchanged at 1.50 per cent in April. The RBA remains relatively upbeat on the prospects for global growth however softness in the labour market remains an area of concern. The RBA welcomed the recently announced macro-prudential measures to “help address the risks associated with high and rising levels of indebtedness”. Rates appear set to remain on hold for some time.
In the US core inflation is inching closer to the Fed’s target. With an economy near “full employment” it is likely the Fed will continue its course of rate hikes in 2017. The move in yields over the second half of 2016 is reflective of improvement in US economic data. Political events will continue to dominate Europe. Core government bond yields have remained largely range bound, but yields could drift gradually higher over the course of the year if political uncertainties are resolved. Credit spreads remain at levels supportive of a more neutral to cautious stance.
Property – AREITs
Rising bond yields have not been friendly to AREITS. However the aggressive sell off has improved value with AREITs now trading below net asset value (NAV). The fortunes of the AREIT sector will remain, at least in the short term, closely tied to the direction of bond yields.
Office shares are still reporting moderate improvements in like-for-like net property income growth. The Sydney market is expected to experience a historically low supply and vacancy, leading to attractive rental growth. Retail appears to be facing some headwinds. Supply is ramping up in regional space and foreign retailers are driving price deflation. Residential developers continue to deliver strong volume and price momentum but there are some medium term concerns given a huge increase in apartment supply.
Whilst underlying property values are close to mature-cycle levels, bond yields are not at levels that will threaten valuations at this stage. We remain cautious on the long lease expiry shares that are trading at large premiums to NTA. Conversely, we continue to find pockets of value in a number of the smaller trusts that offer attractive yield at reasonable valuations.
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