In the video below, Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital asserts that where we are in the global investment cycle is critically important. There is no sign of overinvestment globally – in fact there has been too little investment.
Global monetary conditions remain easy and in the absence of broad based excess (in growth, debt, or inflation) look likely to remain accommodative. The US Federal Reserve (Fed) is likely to hike rates more aggressively this year but it’s still from a very easy base and other central banks (including the Reserve Bank of Australia) are either on hold or easing. Therefore, a shift to tight money that brings an end to the economic cycle looks a fair way off.
While short-term investor sentiment is excessively bullish, long term measures of positioning are not. In the US, the large investor flows into bond funds over the past few years have yet to reverse in favour of shares. Overall, we are still not seeing the signs of excess, euphoria and exhaustion that typically come at cyclical economic and sharemarket peaks. Barring some sort of external shock, the cyclical bull market in shares looks like it still has further to go – particularly if global economic growth returns to more normal levels which in turn will help earnings.
Outlook for Australia
In Australia, we expect continued strength in business conditions with gross domestic product (GDP) growth averaging around 3% over the next few years. Sentiment towards shares as a wise destination for savings remains low and investors still prefer bank deposits.
National residential property price gains are expected to slow to around 3-4% this year, as the heat comes out of Sydney and Melbourne and rising apartment supply hits. Commercial property and infrastructure are likely to continue benefitting from the ongoing search for yield, but this demand may wane over the longer term as bond yields trend higher.
What does this mean for investors?
While market corrections should be anticipated – with US-president elect Trump and upcoming Eurozone elections being potential triggers – we still appear to be a long way from the peak in the investment cycle.
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