Four key drivers for Australian markets and one caution

31 October 2018

4 key drivers

We devote most of our resources to identifying insights that can generate long-term returns and minimise risk. But in the short-term, returns and risk can be driven by very different forces.

Currently, the most important drivers to Australian short-term equity market returns are US growth, inflation, US bond yields and the length of the economic growth cycle.

Four charts that highlight what we see in these drivers:

1) World growth strong, but mostly driven by US

Global and regional PMI

2) Strong US growth is tightening the labour market, threatening rising inflation

US Philips curve

3) Only recently have real yields risen, but remain well below levels proportionate to growth/inflation

Historical relationship between yields and inflation

4) Changing real yield narrative is just now starting to show in style

Cumulative performance by style over last 12 months

Price paid for long-term cash flows is critical to long-term returns

Investment opportunities arise from differentiated insights on long-term drivers such as sustainable free cash flow, quality of business model and strong stewardship, and market prices that diverge from long-term fundamentals. But the price paid for these cash flows is critical to long-term returns.

Taking into consideration the distortions caused by the short-term drivers of persistent low real yields and narrowness of economic growth, today we believe the most important consideration for long-term investor returns in Australian equities will be not paying too much for the Growth/Quality style.

P/E quintiles for S&P/ASX 200

Past performance is not a guide to future returns.
Source: Martin Currie Australia, Factset; as of 30 September 2018
* PMI is derived from monthly surveys of private sector companies, provides a picture of business conditions. MCA combine regional PMIs based on GDP weights. ISM Manufacturing Index used for the US.
** The Phillips curve shows the inverse relationship between the unemployment rate and inflation. Data from 1 April 2006.
*** Data relative to MCSI World index
Calculated using the weighted average of broker consensus forecasts of each holding – because of this, the returns quoted are estimated figures and are therefore not guaranteed.

Important information

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice.

Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.