by Patrick Garrett

After a fairly unusual and turbulent 2016, we expect that 2017 will be less volatile, and we maintain a generally positive outlook for both local and global markets. We expect interest rates, broadly speaking, to rise slowly, and not in a disruptive manner as rising interest rates have been expected now for some time.

Global economic data has been, on balance, fairly positive. For the two largest single economies, recent US data has been strong, and China does not seem headed for a hard economic landing.

We believe that economic conditions in Australia remain generally positive, having navigated the downslope of the mining boom relatively unscathed. The property market soldiers on with pockets of concern, but we do not see this sector as a bubble about to burst.

Compulsory Super and a high immigration rate are ongoing positive forces for the local economy in the face of occasional headwinds. The positive direction of the US stock market and strengthening US Dollar has also helped the local share market. We see these trends as continuing into 2017.

As for the recent negative GDP data, we believe that this was an expected one-off and whilst not inconsequential, does not suggest that an Australian recession is likely given the positives underlying the local economy.

We cannot assume that the positive forces will persist, which is why we continually review the Six Park Watch List on a monthly basis.

Key Watch List Items

• The Trump Effect: Stock markets have rallied since the US election, so it seems that the Armageddon scenario of a President Trump result has, for now, not materialized. This could well be in part due to the fact that some of Trump’s policies are viewed as pro-business, and since the election, Trump has moderated his rhetoric and actions somewhat, in proposing various key posts that diversify his cabinet and backing off some of his more outrageous promises made during the election cycle.

• Global Interest Rates: With the recent stock market rally and strong economic data out of the US, it is now considered an almost certainty that the US Federal Reserve will raise interest rates in December. Will this rattle stock markets (fear of rising interest rates, “Taper Tantrum v2”), or usher in a controlled “Lower for Longer” period of slowly rising rates (but still historically low) in concert with improving economic conditions? It’s to early to tell, but the signs right now seem that the latter is more likely. However, the ever-unpredictable President-elect Trump, unexpected European election outcomes, and/or adverse economic developments in China could alter that view.

• European Union: The recent “no” result in the Italian Constitutional Referendum has led to the possible resignation of Prime Minister Renzi, causing concern about the stability of the Italian banking sector. Markets have thus far not responded to this as a particularly destabilizing event for the European Union, though there are several crucial European elections in 2017 (France, Germany, Netherlands) and investors will be eyeing the results closely amid an increasing support for populist parties. A growing presence of populist parties in politics could affect global trade, monetary policy and ultimately the stability of the European Union. Apart from these elections, Brexit negotiations will continue to dominate the political discourse and all of these events will test the resilience of the Eurozone’s recovery.

Published November 21, 2017