2016 started badly for investors with worries about global growth and deflation but global growth was modest despite political events, rising bond yields and disappointing Australian growth.
In the video below, AMP Capital’s Head of Investment Strategy and Chief Economist, Shane Oliver, discusses the outlook for global markets in the coming year.
Share markets started 2016 badly on growth and deflation fears before rebounding as such fears faded. The Brexit vote, the US election and the Italian referendum caused only short lived scares. In fact, 2016 saw a classic reversal of some of the relative share market performances that had been seen into 2015, with: US shares outperforming in developed markets as the Fed paused, the US earnings recession ended and investors anticipated stimulus under a Trump presidency; resources shares outperforming as commodity prices rebounded helping the Australian share market to perform relatively well; and emerging markets doing well led by Brazil.
Some other highlights:
- After a huge rally in the first half of the year bonds bond returns were subdued with the anticipation of fiscal stimulus under Donald Trump.
- Real estate investment trusts surged in the first half of the year, but fell as bond yields rose, constraining their returns.
- Unlisted commercial property and infrastructure continued to benefit as investors sought decent income yields.
- Australian residential property returns were solid but slowed and remained concentrated in Sydney and Melbourne.
- Cash rates and bank term deposit returns were poor reflecting record low RBA interest rates.
Overall, balanced superannuation funds returns were subdued, but better than cash and bank deposits.
Figure 1: Investment returns for major asset classes
Past performance is not a reliable indicator of future performance.
* Yr to date to Nov. Source: Thomson Reuters, Morningstar, REIA, AMP Capital
Outlook for 2017 and what to watch
Most growth assets, including shares are likely to trend higher, resulting in reasonable returns in 2017. Against this background:
- Global growth is likely to move just above 3%, ranging from around 2% in advanced countries to around 6% in China.
- Headline inflation is likely to continue to rise as commodity prices rise with core inflation rising more slowly.
- The earnings recession looks to have ended – at least in the US and Australia – with solid earnings growth likely.
- Bond yields have gone up too far too fast in the short term, but the trend is likely to be gradually up.
For Australia, the economy is likely to continue to rebalance away from mining investment and pick up again from its September 2016 quarter decline: the ramp up in resource export volumes has further to go; there is still a huge pipeline of housing activity yet to be completed; strengthening approvals point to stronger non-dwelling construction; the drag from mining investment is fading as it falls as a share of GDP and its likely to be close to a bottom next year; recent retail sales data have improved suggesting a consumer bounce back in the December quarter and the rebound in commodity prices tells us that the income recession in Australia is over. Expect Australian growth to be around 2.5% through 2017.
However, near term risks to Australian growth are on the downside, inflation is likely to remain below target for longer than the RBA is forecasting, the RBA is likely to need to offset increases in bank mortgage rates and the Australian dollar remains too high.
The main things to keep an eye on in 2017 are US policy under Trump (stimulus versus trade wars), the US Federal Reserve and the US dollar, bond yields, various European elections, China and the impact of the rising supply of apartments in Australia.
Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.