Investment markets have performed strongly over the last six months or so, supported by continued easy central bank policy globally and by the US (and Chinese) technology revolution. More recently, markets have received another leg up due to a more stable political environment and synchronized global economic growth.
Strongest returns have come from Emerging Market and Japanese equities, US tech stocks, and Australian small companies. Cash and bond returns have been low, but still positive. Whilst many asset classes are showing signs of full valuations, some more extreme than others, none of them are pushing bubble territory.
The US economy continues to perform strongly led by full employment, solid housing starts, strengthening manufacturing data, and consumer confidence leading to rising retail sales. US tax reform now looks likely to pass, which should buffer US corporate earnings.
European economic data has turned swiftly with better employment numbers, rising consumer and business sentiment and confidence, strengthening manufacturing data, banks showing a greater willingness to lend, and rising corporate profitability, earnings, and margins.
The Japanese economy still has plenty of issues to work through, but is finally showing signs of improvement, assisted by extremely accommodative central bank policy, government labour market reforms, and changing corporate culture.
The Chinese and Indian economies are also performing strongly, helped by government policy, population growth / demographics, and rising demand and imports. China does have a debt problem at the corporate level which the government is working through resolving at present. For China, economic growth going forward will be more about the quality of that growth as opposed to the quantity. India is pushing through reforms, but they need to speed up the pace at which these are pushed through and adjusted once live.
The political environment globally remains toxic, but has shown signs of improvement since the French election win by Macron. The Germans still can’t form government since their elections, Brexit isn’t going as smoothly as the pro-exit voters imagined, and President Trump remains an unforecastable quantity, evidenced by his dealings with North Korea and in the Middle East.
The Australian economic and political environment remains weak and troublesome. Consecutive booms (mining, then housing construction) have propelled the economy, but with no more booms in sight, the lowest wages growth on record, constrained household budgets, and declining savings rate, likely mean a period of sub-par growth ahead. All of which is not helped by the incompetent and ineffectual politics at hand. Relief might come in the form of a lower Aussie dollar as the US dollar begins to rise.
On the horizon, current strong market conditions have the ability to continue for another couple of years, even whilst central banks begin to tighten policy and remove liquidity, in a well telegraphed and measured fashion. Once we get to the end of that cycle, all bets are off, as the million dollar question becomes “Can governments, economies, corporates, and households, cope with interest rates 2-3 times higher than current levels with no meaningful reduction in debt levels over that time?”
Time will tell.
The key to robust and sustainable portfolio returns remains:
- Staying invested (ie. investing for the long term)
- Regular rebalancing (ie. taking profits)
- Diversification across and within asset classes
- Taking advantage of opportunities when they present themselves