The Changing Economic and Geopolitical Climate
For some years now we have experienced a low growth, low interest rates and rather subdued economic environment supposedly affecting investment markets negatively. Whilst fixed interest returns have been miserable, growth investments have, in fact, been surprisingly buoyant, climbing the proverbial wall of worry. With all that uncertainty in Europe (the Greek calamity, Brexit, the state of Italian banks, the various elections in European countries), and the perceived elevated level of the US market, international share markets have nevertheless performed quite well, even better than the Australian market.
The world economic outlook now appears to be brightening, interest rates are on the rise in the USA and growth rates prospects are being upgraded around relevant parts of the world, including for Australia. However, concerns still remain such as doubts re the health of the Chinese economy, high levels of debt in many countries and the possibly over-valuation of the US stock market. The new worries are more of a political and geopolitical nature and the new US president, or the so-called Trump factor, seems to be right at the centre of it.
Contrary to general expectations world share markets rose significantly following Trump’s election win. He has promised substantial tax cuts for Americans and their companies as well as strongly increased infrastructure and defence spending – all good for world economy growth prospects. On the other hand, his “America first” pronouncements have prompted fears of the US returning to isolationist policies with consequential threats to world trade. However, any long-term effects appear as clear as mud as he obviously is facing opposition implementing his polices, not to mention his change of mind as regards even major policy directions. In terms of foreign policy, in which area he has no prior experience, he first came out strongly against the Chinese and appeared to seek some rapprochement with Putin and Russia. Then he turned around, calling the relations between US and Russia the worst they had been since the cold war and hosted the Chinese President and labelling him a most sincere and responsible leader. Admittedly, the change of tune followed various international political events. A major uncertainty with possibly grave implications for the world is what Trump may or may not do in relation to the sabre-rattling emanating from North Korea.
Domestically, things are much less dramatic. The recently announced federal budget has been relatively favourably received and is likely to be mildly positive for investment markets, except that the bank bashing in terms of imposing additional ‘tax’ on the major banks has caused bank share values to reduce, probably to a level lower than warranted given the effect on bank profits (as at the time of writing this). Our share market, after a few days of falls, appears fairly valued and we are now in a climate of improving company earnings, although consumer optimism about the future is faltering.