Month Ending May 2017
The global economy ‘gained speed in the fourth quarter of 2016 and the momentum is expected to persist’, according to the International Monetary Fund (IMF) in its April World Economic Outlook report.
‘With buoyant financial markets and a long-awaited cyclical recovery in manufacturing and trade under way’, global growth is expected to be 3.5% in 2017 and 3.6% in 2018, up from only 3.1% in 2016.
This pickup is expected to be larger for the developing world than for the advanced economies, with the developing world as a whole forecast to lift from 4.1% in 2016 to 4.5% this year and to 4.8% next year, while the developed world is forecast to grow by only 2.0% this year and 2.0% in 2018, up from 1.7% in 2016.
To the extent that growth is increasing in the developed world, the IMF notes that ‘the pickup is primarily driven by higher projected growth in the US, where activity was held back in 2016 by weak investment’.
The IMF also makes clear that this improved outlook for the US ‘reflects the assumed fiscal policy easing and an uptick in confidence, especially after the November Presidential election, which, if it persists, will reinforce the cyclical momentum’.
Furthermore, ‘the outlook has also improved for Europe and Japan, based on a cyclical recovery in global manufacturing and trade’.
Despite this, ‘risks remain skewed to the downside, especially over the medium term, with pervasive uncertainty surrounding policies’.
Any policy shifts, such as monetary policy tightening in the major developed economies, have to be initiated with considerable caution, due to ongoing structural problems, most notably a low propensity to invest and historically low rates of productivity growth, as well as subdued inflationary pressures.
The Australian economy rebounded in the December quarter, growing by 1.1%, after actually contracting by 0.5% in the previous quarter but probably slowed somewhat during the March quarter.
In broad terms, the country’s international competitiveness has been eroded in recent years by a union-dominated labour market in key sectors, high corporate tax rates and over-regulation that has pushed up costs (notably for electricity).
As the NAB Business Survey for April notes, while the short-term economic environment appears reasonably positive, the longer-term outlook looks less rosy, ‘as important growth drivers, such as LNG exports, commodity prices and housing construction, begin to fade’.
Major share markets mostly moved little in net terms over the first 10 months of 2016 but then rebounded strongly following the US Presidential election.
Market movements so far this year (up to 25 May) included rises of 8% for the broad US market (S&P500), 15% for the technology-laden Nasdaq index, 10% for Germany, 5% for the UK and 4% for Japan, while China barely moved and Australia rose by around 2%.
Most share markets still appear fairly valued compared with sectors such as bonds and cash.
Major global government bond markets saw yields (interest rates) trend downwards from late 2015 (soon after the US central bank began to raise interest rates) until July 2016, taking yields close to historic lows.
Bond yields moved sharply higher after the US election but have begun to slip back in recent months.
Overall, most bond markets still appear expensive.
Fiducian’s diversified funds are currently somewhat above benchmark for domestic and international shares and around benchmark for listed property.
Exposure to fixed interest sectors is well underweight, while cash weightings remain above benchmark.