2016 was a notable year for investors as it started with a sell-off and poor sentiment driven by concerns around global growth and deflation and ended with all major asset classes delivering solid returns. The best performing asset class was Australian listed property, recording a return of 13.2%, followed by Australian equities at 11.8%.
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Now as widely expected we have just seen the Fed move again – raising its Federal Funds target interest rate from a range of 0.25-0.5% to the range of 0.5-0.75%, begging the question whether we will go through another bout of market ructions. However, this time around the backdrop is very different to a year ago.
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We review our EAP Core Drivers for the Australian banks in 2017 and are increasingly optimistic regarding the outlook for the sector. In particular:
1. Our margin outlook has improved
2. We see diminished regulatory risks
3. Impairments continue to be benign with some potential upside driven by commodities rallies.
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The ASX200 at 5440 at end November, provided a strong monthly return of 2.8% after the weakness evident from August to October. We see modest price appreciation prospects in the next 12 months as profit growth is delivered, partly offset by PE Ratio de-rating as bond yields move higher. Given US policy uncertainties (and the risks of a US policy mis-step), volatility risk is higher than normal, in our view.
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The election of Donald Trump as the next President of the United States saw markets initially fall and then rally strongly with the Dow Jones Industrial Index subsequently
rallying to an all-time high. Other global equity markets also rallied as did Australian equities.
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Now as widely expected we have just seen the Fed move again – raising its Federal Funds target interest rate from a range of 0.25-0.5% to the range of 0.5-0.75%, begging the question whether we will go through another bout of market ructions. However, this time around the backdrop is very different to a year ago.
Click here to read the article.
At the time of writing the US election outcome was tending toward a Trump victory. Post-election markets will most likely turn to consideration of an interest rate by the US Fed. Most economists see a December rate hike as likely however there are a number of factors that make for a more muted market response than that of January/February this year.
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From record lows just after the Brexit vote – government bond yields have spiked higher. Ten year bond yields have risen from 1.36% in the US to 2.2%, from -0.19% in Germany to 0.31% and from 1.81% in Australia to 2.64% in four months. This in turn has led to sharp falls in high yield share market sectors like real estate investment trusts and utilities that had benefited from the fall in bond yields as investors sought higher yields.
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With Donald Trump sounding more presidential and magnanimous since his victory speech, markets have started partially pricing in what they regard as the more favourable parts of his policy agenda.
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We are going through one of those periods where it seems there is a long list of things for investors to worry about: the US election; the Fed; ever present fears about a break of the Eurozone; and China. To be sure these risks are real and in our view some combination of them could drive a short term correction in shares, but we don’t see them derailing the longer term rising trend in shares.
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