Martin Currie Australia Market Outlook Q2 2018 update

Lead indicators of global economic growth have indicated that December 2017 may well have marked the peak of the up cycle globally, with ‘soft’ and ‘hard’ economic data pointing in same direction. Against this backdrop, Reece Birtles shares his perspectives on the direction of the Global and Australian economy.

15 May 2018

Lead indicators of global economic growth such as the World Purchasing Managers' Index, or PMI, have been pointing to the strongest levels of expected growth in more than a decade. However, December 2017 may have marked the peak of this up cycle, with the change in the six-month moving average turning negative.

Despite the recent disappointing global economic data, the outlook for the Australian domestic economy is looking positive for the medium term. Given Australia’s lagged start in the rebound relative to the US, Australian equities are at an earlier stage of earnings acceleration so a lag in the effects of growth are to be expected.

In February 2018’s reporting season, we started to see the tangible signs that Australia’s nominal GDP growth is recovering. Strong industrials revenue growth and lower profit margins are a sign of the increased investment required to lift growth rates. Increased investment in full-time jobs will also eventually soak up the labour market slack and put upward pressure on wages.

In the finance sector specifically, the great unknown from the Banking Royal Commission is the potential for retrospectivity around responsible lending breaches and also implications of loan approval processes for credit creation.  We reflect both of these concerns in a lower profit outlook for banks, via lower credit growth and expected fines.

Cyclicals and value stocks that have been more economically sensitive in the post-financial crisis environment are likely to perform well in the current conditions, but, we no longer believe high-risk value offers attractive return prospects. By contrast, low-volatility, high-quality and high-growth style stocks are likely to suffer in this environment, as  growth is less scarce, and they are more impacted by increasing discount rates from higher bond yields.

Martin Currie Australia’s multi-lensed investment approach of Valuation, Quality, Direction and Sustainable Dividend places us in a strong position to navigate this environment going forward. 

Download the Martin Currie Australia Active Outlook  (PDF)

Despite the recent disappointing global economic data, the outlook for the Australian domestic economy is looking positive for the medium term. Given Australia’s lagged start in the rebound relative to the US, Australian equities are at an earlier stage of earnings acceleration so a lag in the effects of growth are to be expected.

Download the Martin Currie Australia Active Outlook (PDF)

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