Trumpt in 2017 – Hopefully not thumped in 2018

TRUMPT IN 2017 – HOPEFULLY NOT THUMPED IN 2018

Housing prices are already coming off the boil, but non- residential property investments should not be adversely impacted if economic growth precedes rising interest rates as we expect.

At the end of 2017 the world economy certainly looks a lot more positive
than it did at its beginning. Whatever one’s political views there is no doubt that the Trump presidency hitherto has proved bene cial for the outlook for the US economy. Quite apart from the actual good performance of the economy, which has at least partially been impacted by factors in play before Trump, the optimism and current outlook is very much tied in with the Trump endeavour to drastically reduce US company tax rates, now appearing on the cusp of success, which in turn has driven their share markets to ever new highs during the past year.

On top of the US economy that still is the engine room for the world economy, we appear to have embarked on a course of what has been referred to as synchronized economic growth around the (important) parts of the world. China is holding up, contrary to some expectations at the beginning of the year, the troublesome European economies are doing a lot better and even Japan that appeared mired in long-lasting woes has been progressing well. All this has also improved the outlook for the so called emerging economies.

The Australian economy is also looking up with strong growth in employment, still low interest rates, renewed demand for our commodities and potentially a gradually reducing federal budget deficit.

 

So, what could go wrong in 2018? Plenty of things as is usual when optimism is on the rise. Let’s rst put aside the rising geopolitical risks we have previously alluded to, i.e. the North Korean situation and the unrest in the Middle East, factors that are beyond us to speculate about.

When optimism rules, political
and economic managers often get adventurous and, as an example, you would have to wonder what the effect
on the longer-term US economy will
be of the President pursuing large tax reductions in combination with huge
new expenditure on the US military and infrastructure within the country. “Making America strong again” is set to cost a lot of money and the US is already in huge debt to the rest of the world. Will that end in tears?

Returning to the domestic economy and the outlook for investments. There is no relief in sight for xed interest investors as interest rates in Australia are expected to stay at current very low levels for an extended period of time in spite of slowly rising rates in the US and some other countries. Eventually, and barring any left-of- eld factors that could crop up at any time, the strong employment growth should start pushing up wages, boost business investment, promote general growth in the economy and, ever so slowly, start to move up interest rates which is probably more likely to happen in 2019 than 2018.

Housing prices are already coming off the boil, but non- residential property investments should not be adversely impacted if economic growth precedes rising interest rates as we expect.

Australian shares look interesting but also produce somewhat of a quandary. Our share market has performed better than expected in 2017, rising a bit hesitantly in the footsteps of the roaring US markets. Given the current state of the economy it probably represents fair value rather than good value. If the scenario described above turns out
to be reasonably accurate the market should advance in 2018 but probably in starts and stops along the way. Both the Aussie and international markets have exhibited unusually low volatility during the past year. Look out for this changing and in particular it would seem we are due for some sizeable correction at some stage. Even the Australian market has risen, albeit cautiously, without any notable pull-backs for quite some time and some international markets have performed a lot more aggressively and one would expect a period of weakness, from which we would not be immune. However, we have no way of accurately timing the market, so do not even try, just remember that share market investment should be seen as long-term. In the mean-time the market continues
to offer great income returns compared to alternative investments, particularly when taking into account franking credits that are of considerable bene t to the great majority of domestic investors.