Q: How is our economy performing and how do you expect it to be in the year ahead?
A: Our economy is in a good state at the moment. Economic growth improved in the December 2016 quarter after a temporary slowing down in the September 2016 quarter.
We have several reasons to be upbeat about the Australian economic outlook:
- apart from the Netherlands, Australia has had the longest period without a recession
- south eastern Australia is performing well in terms of economic growth
- our resource export volumes continue to surge
- our national income is rising thanks to price increases in commodities, such as iron ore which has contributed to a strong upswing in resource company profits
- government spending on public infrastructure is strong
- the mining boom is nearly at an end
- non-mining investment is expected to grow by around 3% this year.
Overall, Australia is experiencing reasonable economic growth and this should help underpin decent profit growth and returns for investors this year.
Q: How does this affect investment markets?
A: We are still a long way from the peak in the investment cycle. What this means is that the current state of the global economy and stronger profits are helping investments such as equities (shares) rise in value. In other words, we are still in the point of the investment cycle that favours shares as economic recovery continues but is not so strong that it’s driving issues with inflation, excessive debt growth and aggressive central bank rate hikes. See the graph below.
Source: AMP Capital
Q: Do shares or bonds tend to perform better over the longer term?
A: History has shown that even with major downturns in the economy and bear markets, such as the Great Depression, the 1987 crash and early 1990s recession and the global financial crisis, shares have outperformed most other investments. Since 1900 they have generated an average return of 11.8% per annum, compared to Aussie bonds and cash at 5.9% and 4.8% per annum respectively.
Q: Even though statistics tell us shares perform better over time, do many people continue to take a low-risk approach to investments?
A: Yes, over recent years this has been the norm in Australia. The graph below shows how cautious we have become about investing, favouring bank deposits over the share market and superannuation.
Source: Westpac/MI, AMP Capital
Q: What effect has President Trump’s Administration had on investments?
A: Donald Trump’s presidency comes with greater than normal risks. But his pragmatic pro-growth policies around tax cuts, deregulation and infrastructure spending are likely to dominate his populist policies.
However, investors should keep in mind that his Administration will continue to generate much “noise”, which could drive periods of correction/volatility in shares, bond yields and currencies.
The best approach for investors is to look beyond the noise. We expect to see shares trending higher over the next 6-12 months as global growth edges higher.
Q: How is the stronger Aussie dollar affecting our economy?
A: The rise in strength of the Australian dollar over the last year is not good for Australian businesses that compete internationally.
But it does make life a little bit easier for Australians who are on holiday overseas as our tourist dollar stretches a little bit further.
Q: How do you expect the property market to perform this year?
A: Property affordability in Sydney and Melbourne is continuing to worsen, and at some point these markets will start to slow reflecting low rental yields, an increasing supply of apartments, and eventually higher interest rates.
For those who have flexibility around where they buy, now is the time to look for property in areas which have lagged – such as regional centres and in cities like Brisbane and Adelaide where price growth may pick up this year.
Even Perth and Darwin are worth looking at, as their property markets are likely to bottom out this year, after they were hit by a slump in mining investment and the job losses that flowed from it.
Investors should always try and “buy low and sell high” when it comes to buying and selling their investments. Right now Sydney and Melbourne are “high” but Perth is “low”.
Q: Do you think interest rates are likely to go up or down this year?
A: We expect rates to be on hold this year. That said, if the RBA is to do anything on rates this year a cut is more likely than a hike. Why?
The Australian dollar remains too high, slowing housing investment at a time when mining investment is still falling risks slower economic growth, banks are under pressure to raise interest rates out of cycle, and underlying inflation may stay lower for longer, as wages growth remains weak.
But against this, growth has bounced back nicely in the December 2016 quarter, national income is up and RBA concerns about strong house price growth in some cities and the threat to household financial stability that may flow from more rate cuts imply a high hurdle to cutting rates again.
A rate hike is unlikely until later next year.
So, as Shane has explained, while there are some potential bumps to look out for, the outlook for the Australian economy remains sound and there are still opportunities for investors willing to take a long- term view.
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