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Continual but uneven growth for global shares

Expect more volatility this year.

Global outlook

In this video, Dr Shane Oliver, AMP Capital’s Head of Investment Strategy and Chief Economist, provides an outlook for the global economy. He concludes that the overall picture globally has been one of continued improvement in growth and this has supported share markets. The strength in the Chinese share market, in particular, raises the possibility that economic growth over the next 12- months may turn out stronger than expected.

Update on Australia

The non-mining economy is yet to completely fill the growth gap left over from the mining investment boom. While housing construction is buoyant and retail sales growth has improved, the economy faces headwinds in the form of lower commodity prices, tight government spending (fiscal policy) and the Australian dollar (A$), which is still relatively high. As such, growth may remain below potential in the year ahead. Inflation is likely to remain subdued, therefore it’s too early to predict whether the Reserve Bank of Australia (RBA) has finished cutting interest rates.

  Short-term Medium-term
Global equities Europe, Japan, and emerging Asia seem better placed than the US at this point due to the direction of monetary policy and relative valuations. Expect more volatility this year. The cyclical bull market in shares has further to go, but we remain vigilant to any deterioration in company fundamentals, with earnings the key driver of returns going forward.
Australian equities After a strong run, Australian shares are likely to remain under pressure as falling commodity prices weigh, albeit the RBA rate cuts and search for yield is likely to provide some offset. Low and falling interest rates, a lower A$ and a gradual rebalancing in economic growth will help drive profits and the market higher. However, the end of the commodity cycle likely means that Australian shares will remain relative underperformers globally for a period of time.
Government bonds Expect bond yields to gradually rise as the US economy remains robust and the Federal Reserve edges towards an eventual rate hike. Valuations remain stretched. Low starting point yields mean low expected medium term returns. However, bonds retain their diversification value.
Property & Infrastructure Property and infrastructure assets are likely to see ongoing support from the search for yield; although listed assets remain at risk from bond market volatility. Higher yield assets should do well over the medium-term, helped by low bond yields and gradually improving economic growth. The main threat would be a sharper than expected back-up in bond yields.
Commodities Commodities have the potential for a short-term rebound as the market has become overly pessimistic. The extent of the oil price rebound is likely to be limited unless global growth really accelerates. While the force of rising commodity supply can be considered negative, there is likely to be cyclical improvement as the global economic expansion continues and valuations are now attractive for many commodities.
Currencies While the US dollar (US$) has retraced some of its very sharp and strong gains, it is likely to head up again in the near-term. This could lead to Federal Reserve rate hikes. The $A is likely to continue to weaken to below US$0.75 due to poor fundamentals. The US$ is likely to trend higher as the Federal Reserve moves towards rate hikes. The Yen and Euro are likely to remain under pressure.
Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.
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