Originally published by BetaShares
Global Markets
- Concerns over North Korea and US President Trump’s domestic political battles contributed to a “risk-off” move in August, despite ongoing signs of good global economic growth and low inflation. The MSCI All-Country Equity Index returned 0.3% in local currency terms, after a robust 1.8% gain in July.
- Reflecting global tensions, bond yields eased and gold prices spiked 4.1% higher - the latter in turn boosting gold mining stocks. The Nasdaq 100 and global health care stocks also performed well. The flight to safety did not benefit the US dollar, however, which dropped further.
- Reflecting strong gains earlier this year, global equities have returned 11% so far in 2017.
Australian Markets
Australian equities were again remarkably steady in August,with the S&P/ASX 200 remaining in a very narrow range. The S&P/ASX 200 returned 0.7% for the month, slightly higher than the global benchmark. A key feature of the month was a further lift in iron ore prices, which supported good gains in resource stocks.
Bonds yields were also steady in August, while the $A eased back following its strong gain in the previous month.
The S&P/ASX 200 has returned only 3.9% so far in 2017.
Outlook
Despite concerns over global equity valuations, good growth in corporate forward earnings has remained a major support factor over the past year – so much so that global price-to-earnings valuations have been broadly stable during the 2017 rally so far. With growth still solid in the US and improving in Japan, Europe and Emerging Markets, the global earnings outlook remains positive.
At the same time, given low bond yields, overall global equity valuations are broadly in a fair-value range. With global inflation stubbornly low, moreover, central banks are likely to remain reticent to withdraw monetary stimulus quickly, which suggests bond yields may at worst rise only modestly over the next three to six months.
That said, after consistently solid monthly gains since late 2016, global stocks seem due for a period of consolidation at least, if not a corrective pull back. While the specific catalyst for this pull back remains unclear, likely candidates include concerns over North Korea,government shutdown/debt ceiling concerns in Washington, or a more abrupt (than I expect) lift in bond yields.
Despite the recent strength in iron ore price and resource stocks notwithstanding, the local equity outlook remains challenged by more subdued earnings outlook – in part because we lack exposure to the globally vibrant technology sector. Further strong gains in iron ore prices also seems unlikely, due to rising global supply and some moderation in Chinese demand – especially once the October National Congress is completed.
Some favoured investments for the current market include buying the unloved US dollar against the Australian dollar and unhedged global growth opportunities.
