Over the past week Australian shares were up 0.7% with small company shares posting a similar gain. Shares in developed countries rose 1.8% with the US market up 2.0%. Shares in emerging markets were up 0.7%. The Australian dollar increased 1.0% to 77.64 US cents. The Australian 10-year bond yield increased to 2.74% while the US 10-year bond yield increased to 2.83%. The oil price rose 8.6% to 67.39 US dollars per barrel.
We’ve often written about how important it is to understand the economic environment, while being aware that the economics doesn’t always directly align with market performance.
Two years ago, we framed a core economic view titled “Muddle through”. Teleport yourself back two years: there were broad fears globally of an economic slowdown, particularly in Europe and Japan, even to the point of deflation. Our view was that the continued unprecedented levels of stimulatory ‘monetary policy’, that is extremely low interest rates and other techniques to make money easy to access for banks and businesses, would ultimately work.
This has proven to be the case, and wherever we had the chance we looked to participate in the positive environment for risky assets such as shares.
We have just reviewed and updated our core scenario. It’s titled “Late stage synchronized growth, well managed”. Global economic growth has been reasonably strong, especially in the US where interest rates have been increased six times. However, we expect higher interest rates will trigger a global economic slowdown to start within two to three years. We anticipate a shallow slowdown rather than a deep one like the Global Financial Crisis and then a broad recovery.
This flows through to our view on markets, where we also account for valuations. Share markets are not cheap and the outlook for growth is modest. As a result, we expect lower long-term returns from shares. Bond yields remain low and we continue to expect low returns from these assets.
So, overall, we have a more moderate investment outlook. We believe that this is where implementation is crucial: being able to identify new ideas which help lift returns and diversify our portfolios. We’re focused on this challenge.
David Bell | Chief Investment Officer
Past performance isn't necessarily an indicator of future performance.
Data sourced from Bloomberg.