Having spent the past week travelling the country on an ASX Investors Road Show, I thought I’d share with you a few of the key takeaways from my presentation.
The bottom line is that I remain cautiously bullish on the global economic outlook, and hence global equity markets. Globally, we are enjoying both an increasingly broad-based or “synchronised” upturn, with Europe, Japan and several emerging markets picking up over the past year to join the longer established US economic recovery. Fears political populism and an EU-breakup are receding in Europe, and even the long-touted Trump fiscal stimulus has so far not been needed.
What’s more, it’s what might be termed a “Goldilocks” global economy, with growth neither too hot to cause undue inflation and higher interest rates, but also not too cold to push up unemployment and crush corporate earnings. Importantly, with inflation still generally low across the world, central banks generally remain very reluctant to withdraw their punch bowls quickly.
Low inflation and accommodative central banks mean that global bond yields remain very low. Indeed, the Bloomberg Global Aggregate Bond Index retains a yield-to-maturity of only around 1.5%.
Against this backdrop, while global equity price-to-earnings (PE) valuations are modestly above average, this seems easily justified for now given the rich valuations in the bond market. What’s more, global equity markets are also being underpinned by good gains in corporate earnings – helped by improvements in sales activity (consumer spending and business investment) and very tight control of costs. Both European and Japanese corporations are also showing a determination to match US rivals in terms of return on equity.
So far so good. The bad news for Australian investors, however, is that patchy earning performance continues to hold back the local market. While resource companies have produced decent earnings growth of late, thanks to a rebound in iron-ore prices (the sustainability of which is doubtful), we especially lack the tech darlings that are lighting up global markets. From a market or industry sector perspective, Australia remains a good place to source income opportunities, but it’s a case of “go global for growth”. Thankfully, seeking out global growth sectors (like technology, health care or agribusiness) has never been easier for Australian investors thanks to the advent of exchange traded funds (ETFs) which can be bought and sold on the ASX just as easily as a company share.
Of course, there are risks. The US labour market is tightening, and a pick-up in wages and/or price inflation might still be just around the corner. If so, the Fed will tighten policy more aggressively, which could spell the end of the current 8-year global bull market. That said, price and wage pressure remains quite low in the US, and there are strong structural reason why this might remain the case.
Another obvious risk factor is North Korea. But get this: it may surprise some investors to know that the South Korean Benchmark equity index, the KOSPI 200, is up 20% so far this year. Since the current troubles with North Korea started a few months ago, the Korean market has pulled back by only 2.5%.
If even the South Koreans - who would be ground zero in the event of a war - aren’t worrying about North Korea too much, it suggests we might take a measure of comfort also. I guess baring widespread nuclear annihilation (which is not worth insuring against anyway!), the North Korean stand-off seems more likely to end in either a diplomatic solution or regime change though a relatively quick and decisive US assault.
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