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Economic Outlook: February

Shane Oliver takes a look at the economic outlook for February.

This video must be taken in its entirety and any given chapter viewed in isolation does not represent the entire message.

Global

Global growth is likely to be okay in 2015, but it is likely to remain uneven. The US economy should continue to see relatively robust growth, Europe will likely record mild but positive growth, while China will likely see growth around 6.5 to 7%. Inflation is likely to remain low. Global monetary policy remains stimulatory, but 2015 will likely see increasing divergence in monetary policy settings. That is, the US will start to gradually raise rates from around mid-2015, as Europe, China, and Japan continuing to ease monetary policy.

Australia

The non-mining economy is yet to completely fill the growth gap left from the passing of 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 fiscal policy, and a still relatively high A$. As such growth may remain just below potential in the year ahead. Inflation is likely to remain subdued; therefore the Reserve Bank of Australia (RBA) will likely cut interest rates further.

Asset Class Views

  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 fundamentals following a multi-year bull market with earnings the key driver of returns going forward.
Australian equities Australian shares may see some short-term support as the RBA cuts interest rates, but the falling terms of trade is a risk. On balance, retain an underweight bias versus global shares. Low starting point valuations are positive, and a gradual rebalancing in economic growth will help drive profits and the market higher. However, the end of the commodity super 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 Fed edges towards an eventual rate hike. Valuations remain stretched. Low starting point yields mean lower expected medium-term returns. However, bonds retain their diversification value.
Property and infrastructure Property and infrastructure assets are likely to see ongoing support from the search for yield. 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. Oil may fall further but seasonal factors should contribute to a bounce into the middle of the year. While the secular forces of rising commodity supply are a negative, there is likely to be a cyclical rally at some point as the global economic expansion continues and valuations are now attractive for many commodities.
Currencies The US$ is short term overbought and the Japanese yen, euro and A$ are short-term oversold. The A$ is likely to continue to weaken to below $0.75 due to poor fundamentals. The US$ is likely to trend higher as the Fed moves towards rate hikes. More downside is likely for the yen and euro.

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