Investment update 23 April 2018

Last week in the markets

Over the past week Australian shares were up 0.7% with small company shares rising 1.1%. Shares in developed countries rose 0.5% with the US market up 0.5%. Shares in emerging markets were down 0.2%. The Australian dollar fell 1.2% to 76.72 US cents. The Australian 10-year bond yield rose to 2.81% while the US 10-year bond yield increased to 2.96%. The oil price rose 1.5% to 68.38 US dollars per barrel.

Updating our economic views

Last week we detailed our recently reviewed core economic scenario, titled ’Late stage synchronised growth, well managed’. This scenario is reasonably supportive of long term investments in growth assets.

However, forecasting economic outcomes is always difficult. To counter this, we consider a range of possible economic scenarios. We consider the next most likely scenario to be ‘Late stage synchronised growth, policy mistakes’. 

We believe the potential for policy mistakes is reasonably high. Policy mistakes could occur in many areas, primarily:

  • Interest rate policy - central banks raising interest rates too quickly and damaging their economies.
  • Fiscal policy - governments overspending and creating a situation which later requires corrective action.
  • Trade policy - countries taking action to reduce free trade, resulting in a downturn in trade activity.
  • Risk of war - a decision to go to war may have follow-on consequences which negatively impact economic growth.

Compared to our core economic scenario, this alternative scenario is less attractive. An economic slowdown is likely to be deeper and more prolonged. This would be a less appealing environment for investing in growth assets.

Signing off

David Bell | Chief Investment Officer

Past performance isn't necessarily an indicator of future performance.

Data sourced from Bloomberg.