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Oliver's Insights - The threat of war with North Korea - implications for investors

 

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note takes a look at the risks around war with North Korea.

The key points are as follows:

  • Tensions with North Korea have clearly increased causing volatility in share markets.
  • The risk of war with North Korea has grown but a diplomatic solution remains most likely although there could still be more volatility before this is finally achieved.
  • Historically, shares have been adversely affected initially on the uncertainty of wars (or threatened wars) with a potential significant economic impact, but have tended to rally well before the conflict is over.

 

Oliver's Insights - The threat of war with North Korea - implications for investors Oliver's Insights - The threat of war with North Korea - implications for investors (363 KB)

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Oliver's Insights - 2016-17 saw strong returns for diversified investors – here are five reasons why returns are likely to be solid in 2017-18

Shane Oliver, Head of Investment Strategy and Chief Economist.

The following note reviews the investment returns seen over the last financial year and looks at the outlook for the current financial year.

The key points are as follows:

  • Despite a lengthy list of worries including Brexit, Trump and messy Australian growth, the past financial year saw strong returns for diversified investors as shares recovered from a rough time in 2015-16 and real assets like unlisted commercial property and infrastructure continued to see strong returns.
  • Key lessons for investors from the last financial year include: turn down the noise around financial markets, maintain a well-diversified portfolio; be cautious of the crowd; and cash continues to be a poor generator of returns.
  • Returns are likely to slow this financial year but remain solid. Global growth is good, this should underpin profit growth, there are minimal signs of broad-based economic excess that point to a peak in the global growth cycle, global monetary policy is likely to remain relatively easy despite a gradual tightening and share valuations are not excessive.

 

 

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Oliver's Insights - From goldilocks to taper tantrum 2.0 – a bit of turbulence hits markets

Shane Oliver, Head of Investment Strategy and Chief Economist.

 

The attached note looks at the recent back up in global bond yields in response to various central bankers talking about an eventual exit from easy money.

The key points are as follows:

  • Central banks beyond the US are edging towards an exit from easy money. This is likely to cause bouts of volatility in shares and a rising trend in bond yields.
  • However, it's unlikely to derail the bull market in shares as any move to tightening reflects stronger growth (and profits), low inflation pressures will keep monetary tightening very gradual (as we have seen in the US) and monetary policy is a long way from being tight.
  • An RBA tightening remains a long way away.
 

 

 

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Oliver's Insights - The Australian economy hits another rough patch - implications for investors

Shane Oliver, Head of Investment Strategy and Chief Economist.

 

The attached note looks at the recent softening in Australian economic growth and the implications for investors.

The key points are as follows:

  • Annual Australian growth slowed to 1.7% in the March quarter hit by bad weather & weak consumer spending.
  • A declining drag from falling mining investment, strong public infrastructure spending and a likely resumption of trade contributing to growth should all help keep Australia out of recession. However, soft consumer spending and a slowing in the housing cycle will act to constrain growth to below Reserve Bank of Australia (RBA) and Government forecasts. As such, there is far more chance of another RBA rate cut than a hike over the next year.
  • Australian shares will likely be higher by year end. But global shares are likely to continue outperforming.

Meanwhile, today’s consumer confidence data from the Westpac/Melbourne Institute showed a further 1.8% fall in confidence taking it to a subdued reading of 96.2. The combination of poor wages growth, high levels of underemployment, bank rate hikes, higher electricity prices, talk of an increase in the Medicare levy, etc, are likely all depressing consumer confidence. The weakness in consumer confidence continues to contrast with the relative strength seen in business conditions and confidence according to the NAB business survey. The negative impact of low wages growth on household income in contrast to a positive impact on profits (at least in the short term) may be a factor, but it’s interesting to note that the divergence has essentially been in place since the 2013 election.

 

                               

Source: NAB, Westpac/Melb Institute. AMP Capital


Oliver's Insights - The Australian economy hits another rough patch - implications for investors Oliver's Insights - The Australian economy hits another rough patch - implications for investors (164 KB)

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Oliver's Insights - The Trump bump and shares - short-term risks, but five reason for optimism

Shane Oliver, Head of Investment Strategy and Chief Economist.


The attached note looks at the political risks around President Trump and the risk of a correction in share markets generally.

The key points are as follows:

  • The political scandal around President Trump is likely to speed up rather than stop his pro-business reforms.
  • However, after a strong run, shares remain vulnerable to a short-term correction with worries around Trump, North Korea, the Fed, etc, all providing potential triggers.
  • But with most share markets offering reasonable value, global monetary conditions remaining easy and global growth and profits looking good the trend in shares is likely to  remain up.

 

Meanwhile, terrorism looks to have reared its ugly head again this time in Manchester in the UK and our thoughts are with those affected. Financial markets may see a minor short term negative impact but the experience since early last decade has highlighted that terrorist attacks on targets like buildings and sports venues don't really have much economic impact. So while the 9/11 attacks had a big short term share market impact with US shares falling 12% they had recovered in just over a month, the Bali and Madrid bombings had little impact, the negative 1.4% impact on the UK share market of the London bombings of July 2005 was reversed the day after and the French share market only fell 0.1% the next trading day after the November 2015 Paris attacks and 0.3% the day after the July 2016 Nice attack. So while the terror threat is negative for confidence, it would need to cause more damage to economic infrastructure to have a significant economic impact and hence a more lasting impact on financial markets.

Oliver's Insights - The Trump bump and shares - short-term risks, but five reason for optimism Oliver's Insights - The Trump bump and shares - short-term risks, but five reason for optimism (309 KB)

 

 

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2017 Federal Budget has affordable housing at its centre

 

Last night, Treasurer Scott Morrison MP delivered the 2017 Federal Budget.

This year’s budget was not expected to be one of great change for most people and lived up to these expectations in most areas.

Affordable housing was a key focus with measures offering opportunities for those downsizing, investing, and for first home buyers.

You can access a summary of what the budget means for you here 2017 Federal Budget has affordable housing at its centre 2017 Federal Budget has affordable housing at its centre (74 KB)

 

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Investment Solutions Autumn 2017

 

Articles inside this edition:

  • Economic Outlook
  • Boost your super before the rules change
  • When unexpected illness strikes
  • Smart savings for your household

 

 

 

 

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Oliver's Insights - The Eurozone - will they or won't they break up

Shane Oliver, Head of Investment Strategy and Chief Economist.

 

The attached note looks at the risk that the Eurozone will start to unravel.

The key points are as follows:

 

  • Elections in the Netherlands, France, Germany, possibly Italy and another Catalonian referendum will keep Eurozone break up risks in the headlines this year.
  • However, while the risks are significant - particularly in Italy and France - there are good reasons for thinking the Eurozone will continue to hang together.
  • Periods of market turmoil driven by such fears should be seen as opportunities for investors in Eurozone shares and peripheral bond markets.

 

 

 

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Oliver's Insights - The Australian economy and profits

Shane Oliver, Head of Investment Strategy and Chief Economist.

The attached note looks at the outlook for the Australian economy and profits and implications for the Australian share market.

The key points are as follows:

  • A rebound in the economy in the December quarter confirms that Australia is continuing to grow and avoid recession.
  • There are seven reasons to be upbeat about the Australian outlook: thanks to a more flexible economy Australia is on track to take out the Netherlands for the longest period without a recession; south east Australia is continuing to perform well; the great mining investment unwind is near the bottom; the surge in resource export volumes has more to go; national income is rising again; public investment is strong; and there are signs of life in non-mining investment.
  • Economic growth is on track to return to near 3% this year and profit growth has returned to positive after two financial years of declines.
  • Stronger economic growth and profits are good for Australian assets.

 

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The Australian housing market starting to cool (in parts)


Shane Oliver, Head of Investment Strategy and Chief Economist.

Key points are as follows:
 

Australian housing remains overvalued and this has gone hand in hand with 

high household debt. Against this, supply has been constrained and there has 
not been a deterioration in lending standards.

The hot Sydney and Melbourne property markets are showing signs of cooling
  as APRA measures bite. Expect price falls of around 5-10% around 2017.

Property investors need to be careful at this point in the property cycle as 
medium term returns are likely to be constrained.



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