Economic and Markets Outlook 2017

Introduction:

Our economic and markets outlook 2017 shapes the platform by which to guide our investment philosophy for the coming year.  We share it with our clients as part of our process in fulfilling our fiduciary responsibilities to them.   Prospective clients and readers generally are expected to find it helpful.

The fundamental approach to asset values, economies and their constituent performances guide investors as to their risk and return expectations.  In financial terms, this particularly relates to equities (shares), to property; and to cash (and cash substitutes – fixed income products). [For a detailed analysis of the investment risk characteristics of these asset classes, read our article ‘Investment Portfolio Diversification‘.]

One forecaster that we found in researching for this forecast encapsulates our own view of the probable 2017 scenarios.  They stated that ‘…2017 should be a modestly positive year, continuing the long recovery from the GFC’.  They went on to say ‘– but with four key differences over recent years as we move through 2017:-

• Populism is challenging globalism and creating new tail risks.
• Concerns about low growth are giving way to concerns about inflation.
• Years of focus on monetary policy are giving way to a close watch over fiscal policy; and
• Concerns about new regulation are acceding to hopes for de-regulation.‘

Investors look to economic conditions in different regions to determine the financial impact on the assets in which they invest. Our comments begin with the economic positioning in key regions (domestic; and major trading partners).  We then extrapolate those influences to how we see the markets behaving in relative regions. Investment markets available to Australian investors are broader than being limited to Australia’s most influential trade partners.

Economic outlook 2017–

Generally, we expect 2017 to be a year of some consolidation economically: with anticipated global GDP at around 3.4%. Most developing economies’ central banks are reducing the ‘easing bias’.  In the case of the USA, the Fed is normalising the interest rate for that economy.

US President Trump has cast an ominous cloud over ‘free’ trade.  However, the rest of the world will seek to open their trading borders and increase the productivity of their workforces .  And it appears that a modest level of inflation, a ‘good’ level, should return during 2017.

Individuals should start to experience higher levels of confidence.  Consumers with limited, or no debt should start to spend, with positive effects on the economy.

In selected cases, we see the economic outlook as follows…

Australia:

• Exports are our main source of income.  The value of the AUD against our trading partners will impact; our dollar needs to retreat further yet. Early-2017 trade surplus may be a short-lived gain. Developments for our major trading partners will be important.  We see China, Japan, the USA and India as those of particular interest in this regard.
• Transition from mining and manufacturing, to services economy to progress, but continues at a slow pace. We expect GDP for the twelve months to be around 3% on our reading of the various industry reports.
• Housing construction likely to contract, putting pressure on unemployment stats, consumer sentiment – and negatively impacting on retail sector. The time-lag for local authorities to clear the way for increased land supply is constraining recovery in this area.  The quest to live within 20-minutes from work may delay recovery for another year or two.  Bear in mind that residential construction has enjoyed almost three years of growth until late-2016.
• RBA has official rates so low, they now have limited capacity to influence either markets, or the currency.  Some forecasters are suggesting they will cut twice this year, to end at 1.00%.  This view isn’t widely supported.  Our own view is that whilst there may be two moves by the RBA on interest rates during the year.  We expect the end result will be where we start the year – at 1.50%. Commercial interest rates are increasing without RBA intervention RBA and so there is less pressure on them to act.
• Fiscal developments would be most effective to stimulate the economy and to keep the transition ‘on track’.  The current political scenario is not conducive to any significant developments.
• Political instability is likely to be the norm for 2017, both here in Australia and elsewhere in democratic countries globally.  Those countries with elections due (primarily in Europe this year) could fuel this market disruption.  There are early signs that Australia could have a Federal election later in the year.

Our Trading Partners:

China:

• Political undercurrents develop as the leadership group transitions to a younger team.  Changes are due over the next year or so.
• Economic developments should continue to focus on transitioning the economy from an export-driven, to a consumption economy. Recent improvement in the global steel industry bode well for our continued sale of iron ore and coking coal here.
• China’s relationships in the region – and with the USA – could impact their economic development this year.  It could also impact their willingness to trade with Australia. The relationships of most interest are those with North Korea, Japan, the Philippines and their continental neighbours.
• Whilst it is difficult to have confidence in the published stats, 2017 growth will probably be reported at around 7%.

Japan:

• ‘Abenomics’ continues as an experiment – and with questioned success.  Factors impeding their 2017 growth, include:
  • their ageing population, intolerance for immigration,
  • low birth rates and
  • a low-growth economy
• The failure to secure ‘the submarine deal’ may cool the trading relationship between Japan and Australia. We don’t anticipate any significant downturn on that front for 2017.
• Low, even negative interest rates are impeding the development of a ‘healthy’ level of inflation for Japan. Measured against the USD, the yen is expected to fall further during the year.

The USA:

• The election of Donald Trump as President surprised many.  It has brought a decidedly unwelcome level of uncertainty to global trade and relationships.  His naïve approach to global diplomacy has set many of the trading partners and defence alliances, on edge.
• The claims by the new President to ‘make America great again’, their implementation will be interesting to watch.  His mantra gives rise to the questions:
  • what will it mean if America is to be great again? …and
  • in whose eyes is it to be seen as great again?
• Early in his Presidency, some attempts to implement the ‘policies’ on which he campaigned have proven either:
  • ineffectual, or
  • are being challenged in Courts in the US.
• The President’s efforts to revitalise their economy and to get people back into decent jobs, are being made when:
  • unemployment is low,
  • interest rates are low,
  • inflation and growth are low – and
  • trust in the US as a trading and defence partner, is declining (as a consequence of his actions).
• We expect the USA to report GDP growth for 2017 at between 2% and 3%.  Our expectation for their sharemarket is for growth between 5% and 7%.  There is a proclivity toward the lower end of this range amongst forecasters’ commentaries we have read.  We expect inflation to increase (perhaps beyond the Fed’s target range) in response to wage pressures.  Two interest-rate rises by the Fed (with both of those rises likely to happen in 2017H2) should be expected. [Other inflationary pressures on the US economy, include:
  • the projected infrastructure spend – although that will take time to initiate; and
  • the imposition of trade tariffs. This trade restriction was proposed by the President during his pre-election campaign.]
• Whilst there is a positive outlook for the 2017 year, there is concern arising that some of their policies may lead to a recession by early 2018.

India:

• India has not traditionally been a strong trading partner for Australia.  Its economy is transitioning to having a higher proportion of middle class families.  In this transition, the demand for both mineral and agricultural commodities/ products from Australia will continue to increase.
• Action to curb corruption in India (by ceasing high value paper currency circulation) has impacted the banking sector.  It has also impacted internal trade generally.  This may slow down the rate of improvement in living standard for this country.
• Infrastructure enhancement, indeed development, will be a key to growth and productivity in India.  Australia will benefit from the demand for mineral resources that will accompany the growth of the electricity distribution network.  Australia’s resource sector should also benefit from the improvement of power generation capacity in India.

Globally:

• Many countries are attempting to keep a competitive trade advantage by taking any reasonable means to lower the exchange rate on their currency.  These attempts are ultimately futile, although they have short-term advantage when timed correctly. We expect to see more ‘talking down’ of currencies; as well as market intervention when required.
• The major economic blocks are out of step with each other in their recoveries from the after-effects of the GFC. The USA and China are ahead of the rest in this regard.  Europe and Japan are thought to be about three years behind the USA.  With instability in the EU – and its adoption of the Euro, there could be further delays for them on this front. Other emerging economies are struggling and remain very dependent on the USA and other more developed economies for both economic direction and financial support. Overall, the outlook for global growth projected by the IMF for 2017, is 3.4%.

Markets outlook 2017–

In keeping with the modestly positive economic outlook for 2017, we also expect there to be positive results over the year in most markets. Remembering that markets generally indicate future economic conditions¹; and that share markets in particular, react quickly to any unexpected news or profound uncertainty, we anticipate that there will volatility in the share and bond markets that will provide opportunities for traders and tactical opportunities for investors during 2017.

[¹ For more on this relationship between economics and the markets, refer to our article ‘Investment Markets and Investor Behaviour‘.]

Subject to a view on hedging international investments, we believe that, in local currency terms, the majority of investable markets will generate a positive outcome for the year. Dealing specifically with the equities, property and cash (fixed income) markets within some particular economies, we detail our outlook for 2017 below…

Australia:

Equities

Equities (shares) in Australia have continued to increase in value at what some might consider ‘a snail’s pace’, but given the high level of dividends (and the accompanying imputation credit) the returns for Australian investors have been at the high-single digits level for a couple of years. Share market prices have been more constrained in Australia than in markets with less favourable tax treatment. There is too much political, including geopolitical uncertainty to be able to make a confident prediction as to the direction of the Australian sharemarket for 2017: but at a forced guess, we would be satisfied with a flat year on prices, with continued dividend returns providing most of the reward for share investors.

Property

Property, from an investor viewpoint, is generally commercial – factories, offices and shops; until the economy grows more convincingly, the demand for these properties remains subdued. Even residential property, which is also an employment intense industry, is expected to be subdued for 2017. Unless there are fiscal measures taken to improve the outlook, we don’t expect much growth for this sector: flat, to perhaps modestly negative.

Cash

Cash and cash ‘equivalents’ (such as fixed income, bonds) has provided very low returns in recent years – and without demand driven incentive to have more competition for the funds available (that would come from increased construction activity, strong manufacturing for export, or infrastructure development), we don’t anticipate there being any significant change in official interest rates, or investment yields on this asset, for 2017.

The USA:

Equities

Equities in the USA are poised, even at their elevated valuations, for a further increase in value during the year. This is supported by the improving growth of the economy, the perception of a more business-favouring President, the very gradual ‘normalising’ of the official interest rate by the Federal Reserve Bank (the Fed); and where that country is, in its economic cycle. (The US stock market represents around 40% of the world’s value of equities and so is heavily represented in diversified investment portfolios, global equities allocation.) We anticipate growth in the high single digits for 2017.

Property

Property, even in the USA is undergoing some challenges, recognising the cumulative effects of increasing technology in use in workplace environments, a preference by workers to have a work-life trade-off in their decision about where they will work – and, until the Trump attack on free trade has its effect, a broader distribution of manufacturing facilities and supply-chain logistics. Whilst low interest rates would traditionally be considered a positive for this part of the market, this is of less importance today. We expect flat to low single digit growth in this asset for 2107.

Fixed Interest

Cash and fixed interest markets are somewhat of an outlier in the current environment: interest rates are low, regulations are tightening in relation to lending, GDP is subdued around the world; and, as these conditions have prevailed for quite some time, with commercial pressures on interest rates rising, the significant volume of Bonds (both government and corporate) issued when rates were lower, will be under pressure to devalue to provide yield matching those rising interest rates.

The rest of the world:

• Equities in all other markets will move according to local conditions, but affected by what happens on the major exchanges (in New York, London etc) – and be influenced by what happens in emerging economies. We expect there to be little growth overall – but obviously expect there will be pockets of sound growth providing excellent investment opportunities (others will be not so favourable, including some that will be negative over the year). [One forecast has the global equities market increasing by between 5% and 8% for 2017.]
• Property is similarly expected to stay flat globally. There is no obvious impetus for growth in this asset, other than in a spasmodic, local and/ or specialised sense.
• Cash and fixed interest will be favourable in the ‘rest of the world’ market place in the wake of the larger, developed economies absorbing the safe investors’ funds, leaving the others to fight it out for the limited funds available. Provided investors can bear the risk, some good returns should be available – with appropriate hedging.

The Continuum FP application of the Economic and Markets Outlook 2017

In the context of this outlook, Continuum Financial Planners Pty Ltd looks to various fund managers, researchers and analysts to satisfy ourselves that the products we have recommended to clients, continue to be managed in concert with the strategies adopted by the client – and consistent with investment strategies and philosophies that were indicated to us at the time of placing funds with them.

For 2017, we favour managers who are well supported with broad-based research, have a proven track record of ‘true to label’ consistency, are appropriately positioned to be able to take advantage of buying opportunities – and who sell, when the analysis indicates that is the correct trade, regardless of any ‘gut-feel’ or constructive bias they may hold.

Our supported managers in the equities space will be investing in businesses that have sound balance sheets (low levels of debt), sustainable business models, are price makers – and who operate under sound governance. Supported Property managers will be invested in property with reasonable levels of debt, strong tenancies – and funding distributions from net income generated. Supported Bond managers will have short- to medium-term duration in their portfolios – and be nimble in making trades, aware that these markets can turn quickly.

If you would like to meet with us for wealth management advice, please:

• call our office; or
• use the Make A Booking facility to arrange an appointment at your convenience.

(This article was first posted in February 2017. It has occasionally been refreshed/ updated, most recently in August 2024.)