Over the past week Australian shares were down 1.1% with small company shares down 0.6%. Shares in developed countries rose 1.0% with the US market up 0.9%. Shares in emerging markets were up 2.0%. The Australian dollar increased 1.0% to 79.95 US cents. The Australian 10 year bond yield increased to 2.87% along with the US 10 year bond yield, which rose to 2.66%. The oil price fell by 1.4% to 63.37 US dollars per barrel.
Data sourced from Reserve Bank of Australia.
Our 2017 ‘report card’ would receive good reviews by teachers and parents. After a soft patch in the middle of last year, economic growth (as measured by GDP) rose to a strong position by the end of 2017. Unemployment continues to hover around 5.5%. Australia’s inflation rate remains low at under 2%, with few obvious risks to the upside. Low inflation has allowed the Reserve Bank of Australia (RBA) to maintain extraordinarily low interest rates.
Our forecast for 2018 is continued good economic performance. The key potential risk is a housing price crash combining with highly leveraged households. Our investment team monitors this risk very closely. There is also a risk of the RBA raising rates a little too quickly.
Of course strong economic performance does not guarantee strong market performance. Valuations matter as well as the performance of companies themselves. Equity markets are quite expensive. This means that over the long term we expect more subdued returns than those experienced since the end of the GFC.
David Bell | Chief Investment Officer