2017 Investment Outlook

A brightening outlook overshadowed by geo-political uncertainty


With continuing low interest rates, it is hard to generate much investment income from anything else but Australian shares and/or property.

In spite of the foreshadowed fall in Telstra dividends (which fall,
by the way, won’t happen until next year), it is not hard to achieve an income return of 4-4.5% from a well- diversi ed, conservatively constructed, income oriented portfolio of listed shares and property securities. To boot, many clients would bene t from franking credits on top of this level of return that would further boost the total after tax return. Capital gains is a different story, with the Aussie share market trading at static levels compared to at the very beginning of this year, although it certainly is higher over, say, a 2-5-year perspective.

As previously indicated, geo-political factors are increasingly throwing their menacing shadow over the progress of investment markets and now, of course, it is all about North Korea. If this develops into a full-blown catastrophe then all bets are off in terms of the normality of markets. Right now, however, it would seem that even South Korea is going about its business more or less as usual in spite of its precarious position.

Putting the geo-political worries to one side, the economic circumstances that ultimately guide the progress of investment markets appear to be brightening. The US economy is continuing

to improve, having now reached a point of almost full employment with interest rates on a path of rising slowly in a controlled fashion. The brightening outlook has also reached Europe, and the worry about a signi cant slow-down in China has subsided.

At home, the economic outlook is also brightening. Employment growth has picked up and, pleasingly, and in contrast with trends a little while ago, it is full-time employment that is doing the running. Retail sales have been rising very hesitantly, likely held back by households generally high indebtness and virtually static personal income levels. For the just concluded company reporting period it is clear that company pro ts are increasing, although the improvement is skewed in favour of the recovery of the resources sector. Nevertheless, there are signs the slack in the economy that was created by the end of the resources boom a few years ago is now taken up by other sectors.

So, from an economic perspective, we are now more optimistic than we were, say, six months ago. Employment growth should eventually force household income growth which in turn should lead to higher consumer spending which, together with already high and rising government infrastructure spending, should positively affect company pro ts – so the economic theory goes.
A y in the ointment is the rising Australian dollar which would tend to slow the economy, but part of the dollar appreciation is due to the fall in the US dollar which other factors suggest is temporary in nature.