Outlook for the ASX in 2017
What is likely to drive the market for 2017?
Global economic growth is lifting, driven by developed markets (particularly better conditions in the US). Despite this positive backdrop, Australian growth has slowed recently because the transition from a mining to a non-mining led economy, has been challenging.
Additionally, the Australian dollar hasn't depreciated by enough, even after cash rate reductions. This has constrained non-mining profit growth. As a result, earnings growth of about 5% is expected this year across the broad economy.
The key driver of the ASX over the past year has been the improvement in profits for resource sector businesses. This is because commodity prices have risen.
However, it's unlikely commodity prices will lift to the same degree this year as they did last year. Rather, there could be a pullback given Chinese growth is expected to slow to around 6-6.5% over the next two years, compared to 6.7% last year.
Aside from the resources sector, other industries that are likely to see an improvement in profit growth this year include retailers, utility companies, telcos and building materials.
But generally the revenue outlook is likely to remain constrained as pressure remains on businesses to cut costs in a low growth environment and while the currency remains high.
Expectations for the labour market are mixed. The unemployment rate is at a reasonable level at about 5.8%. But the level of underemployment in the economy is still quite high, at 9%. This is because part-time work has risen in recent years in areas like education, healthcare and accomodation. The unemployment rate will probably remain at around 5.8% this year.
Turning to interest rates, if inflation remains low the potential for a 0.25% cut to the cash rate rises in May. Should that eventuate it should help drive growth and the share market. But it would be overlayed against an uncertain economic backdrop and low inflation.
The Australian dollar will take its lead from the US this year. The value of the greenback has steadied recently following market euphoria in response to certain election promises President Trump put forward including tax cuts and infrastructure spending.
However interest rate rises in the US may be a consequence of some of these policies, which should be positive for the US dollar because it means the Federal Reserve will have to raise interest rates faster than the market is expecting. At the same time, potential fiscal stimulus and taxation changes will take time to impact the economy.
We expect the US dollar will continue appreciating and anticipate the US Federal Reserve will lift rates two to three times this year, which is yet to be fully priced into the market.
The US job market is reaching full employment. Subsequently wages growth could go higher.
Overall US growth is expected to continue to improve. Business investment is picking up thanks to high commodity prices, although a higher US dollar is a risk to business investment.
The China effect
We have a positive view of China for the next few years. The government is trying to maintain a growth rate around 6.5% in 2017, which will be positive for the local commodity sector.
The risks in China are around debt levels and how the high levels of debt will unwind over the next two years. But at this stage, indicators look stable. The Purchasing Managers Index is still expanding, which is good for manufacturing, which flows through to demand for commodities.
Activity in the services sector is stable in China, which is another positive given the economy is transitioning from a manufacturing or a mining-led economy to a services-based economy.
There are still opportunities for growth in China because the middle-income population is rising at a rapid rate, which is positive for services globally and Australia.
For instance tourist arrivals in Australia from China are now running at the highest level compared to all other countries. Chinese travellers are the highest spenders of all foreign travellers. There is also demand for other local services such as healthcare and education. So Australia’s reliance on China is set to continue for some time and not just from a mining perspective. This should be positive for the economy for the next few years.
It’s likely the relatively strong Chinese market, as well as the domestic economy, will help drive the sharemarket in the immediate term.
About the author
Diana Mousina is an Economist within the Investment Strategy and Dynamic Markets team at AMP Capital. Diana’s responsibilities include providing economic and macro investment analysis and contributing to the performance of the dynamic markets fund.
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