Martin Currie Australia Market Outlook Q2 2018 update

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. 

Important information

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

The information contained in this presentation has been compiled with considerable care to ensure its accuracy. But no representation or warranty, express or implied, is made to its accuracy or completeness. 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. 

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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. Please note the information within this report has been produced internally using unaudited data and has not been independently verified. Whilst every effort has been made to ensure its accuracy, no guarantee can be given. 

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