Market outlook for next financial year
The global economy looks strong for next year but different risk factors may affect consumer and business confidence.
One source of uncertainty are elections, including the outcome of our own upcoming federal election, which could impact investments.
Generally, for Australia, it is expected that interest rates will remain steady and wage growth will remain weak, albeit strengthening slightly. Property prices will continue their correction, but without crashing and unemployment will remain low.
US mid-term elections
Many state political races will be happening in the United States in November 2018. This represents a national vote on the policies of President Trump and an indicator of US policy in 2019 and beyond. Should the US Democrats gain a substantial mandate we could see more political gridlock in Washington.
Prime Minister Turnbull is expected to call the next federal election between early August 2018 and May 2019. The Coalition has been battered by scandals over the past year, such as the Barnaby Joyce saga, leading to the party losing its 30th consecutive Newspoll to Labor.
The UK’s exit from the European Union (EU) continues and a final deal is expected by November 2018. This could be a source of market volatility over the next year as the UK Government works to resolve various issues including customs arrangements with the EU.
Global economic outlook
Global economic growth looks set to continue, with both business and consumer confidence holding up, despite volatility at the start of the year. One risk is whether the Trump Administration, through new sanctions or threats on trade, upsets investor confidence. This occurred earlier this year in the tit-for-tat imposition of tariffs on imports between the US and China. Another risk is the prospect of the Federal Reserve hiking interest rates too quickly.
In the past, rising US rates have led to issues for over-geared parts of the economy.
Australian economic outlook
The Reserve Bank of Australia (RBA) has forecast that the economy will grow more this year than in 2017. Upside surprises include a surge in commodity prices if China grows faster than expected. This is less likely given China’s efforts to curb excessive investment and construction. However, disruptions to global growth, where our commodities such as steel and coal are key components, could see our economy struggle.
Wage growth is likely to remain weak. The RBA has signalled that wage-growth pressure is building in the labour market with the unemployment rate at a low 5.5 per cent. However, the underemployment rate remains high indicating there are many people who would work more hours if they could. Until that starts to drop more, wage growth is likely to remain weak.
It’s likely that inflation will remain at or below the lower end of the RBA target rate given the likelihood of limited wage growth. This was further confirmed with annual inflation, to March 2018, tracking at 1.9 per cent — below the RBA target of 2-3 per cent.
Not only is wage inflation weak but households are heavily geared. Until the RBA sees wage growth helping to erode this debt we are unlikely to see interest rates move higher.
We should expect to see the unemployment rate fall, given the positive outlook for economic growth. However, this must be balanced against the weak level of consumer demand. Consumers are making up for low wage growth by drawing down their savings or taking on additional debt to finance their spending which cannot continue indefinitely.
Unit construction has recently surged in Sydney and Melbourne and, to a lesser extent, in Brisbane. This new supply still needs to be absorbed by the market. In addition, regulatory restrictions on investment lending appear to be biting with weaker growth in Melbourne and price declines in Sydney in recent months.
This is continuing to play out but an outright crash is unlikely for two reasons. The first is the ongoing immigration intake, approximately 200,000 people last year, which supports housing demand. Secondly, policymakers are incentivised to prevent declining prices given how much Australian household wealth and bank lending is concentrated in property.
Outlook for Australian shares
The Australian market is positioned to perform well, but will likely underperform international shares. Bank stocks account for a large portion of the Australian share market and given the risk of additional regulations this could hamper profits. High household debt also restricts the ability of banks to grow revenue and hence profits. Natural resources (metals, oil and gas) account for almost a third of the Australian market. While commodity prices have risen thanks to rising global economic growth, they are unlikely to boom.
Taken together it’s likely to be a positive year overall but not an especially strong one.
Bridges Financial Services Pty Ltd (Bridges). ABN 60 003 474 977. ASX Participant. AFSL 240837.
This is general advice only and has been prepared without taking into account your particular objectives, financial situation and needs. Before making an investment decision based on this information, you should assess your own circumstances or consult a financial planner or a registered tax agent.
Examples are illustrative only and are subject to the assumptions and qualifications disclosed.
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