Investment considerations as Aus and US experience equity growth

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July 31 2019
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Against a backdrop of stuttering economies and low interest rates, both the Australian and the United States markets have managed nearly 20 per cent growth to equities this calendar year, a portfolio manager has noted.

Speaking at a Fidelity International market outlook event, Fidelity portfolio manager Kate Howitt considered how Australia and the United States are both achieving strong growth in a “late cycle bull market.”

Commenting that “it’s not a great macro backdrop”, Ms Howitt has observed stock doing “that climb the wall of worry thing they do, so it really has been about policy”.

Markets not likely to fall into recession

Fidelity International argued that from a historical perspective, signs are looking good for both the Australian and the United States economies to avoid a recession.

Commenting on the “interesting” market factors at play at the moment, Ms Howitt said “very supportive policy and markets are taking the glass half full version – that is interest rates are low therefore valuations can go higher.

This is opposed to the “glass half empty version”, where supportive policy must mean the outlook is dire and we are heading into a recession”, Ms Howitt considered.

According to Ms Howitt, “stock markets [being] up 20 per cent is not what you would expect to see if you have the world’s major economy heading into a recession”.

Will the United States cut interest rates?

The Reserve Bank of Australia, like most developed nations, has cut interest rates as weak inflationary numbers have hit the major economies. With the world cutting, attention has turned to the United States to see if the powerhouse would follow suit and lower its official cash rate.

Despite strong growth in equity markets, Tribeca’s portfolio manager, Jun Bei Liu, believes the United States will still see cuts to local interest rates.

Markets will be cut as an “insurance policy” and a way to show the federal reserve is “willing to step in” if required in the future, according to Ms Bei Liu.

Reporting season

As companies head into reporting season, investors are bracing for pain, as well as seeking buying opportunities due to the potential for share price drops.

Despite strong earnings, 60 per cent of companies in the United States are downgrading future earnings, according to Fidelity, suggesting the market is on a late cycle of earnings.

Ms Bei Liu noted a lot of risk swirling around this reporting season, in an environment where only minerals and staples are in a positive earnings per share outlook, with all other sectors having downgraded their previous profit projections.

Despite this low cash yield environment, Ms Bei Liu said she thinks investors will continue to look for dividend-paying stocks, in turn aiding in strengthening of equity markets.

“In a world where interest rates are going lower and lower, the hunt for yield, the hunt for additional return is going to continue,” Ms Bei Liu said.

Impact on investors

Regardless of the macro economy, she said savvy investors can always find a way to get ahead.

“Regardless of the top down view of where the macro is going, there will always be a company that will outperform the market,” Ms Bei Liu offered.

She cited in-depth research and having an understanding of where the highest returns are coming from as ways for investors to find success.

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About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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