Invest
Predictions for the major asset classes
Equity markets have staged a rebound since the middle of February after one of the worst starts to a year, but what is still to come?
Predictions for the major asset classes
Equity markets have staged a rebound since the middle of February after one of the worst starts to a year, but what is still to come?
Two months ago, markets were concerned about China, oil prices and US manufacturing.
These fears have now largely dissipated, with the rally driven by supportive central bank actions, easing credit concerns and an improvement in macro data.
It is expected that these recent trends will continue and, in this environment, equities and property are preferable to fixed income and alternatives.
What a difference a couple of months can make.
The chart below shows that global equities have rebounded in March and April after falling precipitously earlier in the year.
In fact, most markets are now back where they were at the start of 2016. Commodity prices, particularly oil and iron ore, have also rallied sharply, while the Australian dollar is almost back at 80 cents.
So what was all the fuss about? Looking back, investors were concerned about a number of issues.
China’s decision to depreciate its currency in January raised questions about the state of its economy. There were fears that the sharp fall in oil prices could stir energy defaults and threaten the health of banks.
US economic data was weaker and investors were worried this would push the US economy back into recession.
More broadly, investors were questioning the effectiveness of central bank policies in further supporting growth, particularly following the poor response to Japan’s introduction of negative interest rates.
Fast forward to today, and there are several reasons why markets have rallied so handsomely:
The US Federal Reserve
The US Federal Reserve (Fed) has pulled back from its plan to raise interest rates multiple times in 2016. At its December meeting, the Fed projected that it would raise rates four times this year.
Last month, it lowered this forecast to two. Market pricing is even more conservative. This has put downward pressure on the US dollar.
China
China has signalled an intention to slow down its reform agenda and to stimulate its economy. Credit growth has picked up sharply and the central bank has been lowering reserve requirements, while fiscal spending has been ramped up.
These efforts are putting a floor under Chinese activity. Earlier concerns that China was on the brink of devaluing its currency to counter capital outflows have dissipated for now.
Recession fears easing
There has been an improvement in US macro data, helping to reduce recession fears. The manufacturing sector is expanding again, supported by rising oil prices and a lower US dollar. Labour market data has also continued to improve, while consumption has held up.
There has been easing in credit market concerns, partly due to the decision by the European Central Bank to begin purchasing corporate bonds as part of its quantitative easing (QE) program.
We do not think that the good times are over, retaining our relatively positive view on markets.
While we expect subdued economic activity to continue, it should be strong enough to ensure that Australian and international equities will outperform global bonds.
Meanwhile, property will deliver strong returns as income growth and yields remain healthy. Commodities returns will be modest but better than in recent years.
Here is an overview of our thoughts on the major asset classes:
- We have a preference for Australian equities primarily on valuations. Australia has lagged other markets during the bounce from market lows, and this is now reflected in better valuations. There is also some prospect for higher earnings as commodity prices stabilise.
- We also have a positive outlook on international equities through Europe in particular. We expect healthy earnings growth in Europe as their economic recovery progresses and the expansion of QE affects a broad range of asset classes. We are neutral on US equities, and have moved back to neutral on emerging markets, given the pick-up in Chinese activity.
- We are positive on property in Australia and internationally. Low bond yields could push capitalisation rates lower and income growth is steady in most markets.
- We are negative on fixed income, particularly international government bonds. While we don’t see rates rising sharply, coupons are so low that returns will be low. Domestic bonds should perform better than international bonds, as we assume the spread between the two will contract further.
- We are wary of alternatives. Hedge funds should continue to struggle with a reduced opportunity set from poor market liquidity and dampened volatility.
- We have a neutral view on commodities. We assume that the economic recovery in the Chinese economy provides a better backdrop for industrial metals and energy, while we forecast small positive returns from precious and agricultural commodities.
- The Australian dollar is currently trading around fair value, with the risks evenly balanced.
Tim Rocks, head of market strategy and research, BT Investment Solutions.
Property
Australia’s top 20 suburbs for property investment revealed
NSW has the most investment opportunities, according to ME Bank, but a Brisbane suburb has taken out the top spot. ...Read more
Property
CBA forecasts 10% house price drop for 2023
The Commonwealth Bank is the most negative of the majors on property prices. ...Read more
Property
Buying an apartment? Ask this first
If you’re looking to buy an apartment, there are a few things you need to consider. ...Read more
Property
What to look for in a rentvesting apartment
Rentvesting demands potential property investors think more strategically about their purchases. ...Read more
Property
FHBs should weigh the pros and cons before buying an apartment
If you’re considering an apartment as your first property purchase, you probably aren’t the only one. ...Read more
Property
Why first home buyers might want to consider an apartment over a house
Cost and location can play in favour of first home buyers when it comes to apartments. ...Read more
Property
1 in 2 Aussies can’t afford an interest rate rise
Aussies are increasingly unlikely to meet their loan commitments if rates lift, new research has shown. ...Read more
Property
Ageing homes account for one-fifth of Australia’s emissions
Almost eight million Australian homes remain energy-inefficient, leading to calls for a large-scale redevelopment program. ...Read more
Will housing affordability improve in 2022? Will buy now, pay later become the norm? Why are Aussies staying in failing super products?
Listen now
Who really benefits from crypto ETFs? How will the RBA respond to rising inflation? Could a mandate help address unpaid super?
Listen now
How the post-lockdown period will influence property, what the soaring NFT market means, and defining financial wellness
Listen now
APRA’s mortgage crackdown, the power of DeFi and last-minute tax tips
Listen now
Property
Australia’s top 20 suburbs for property investment revealed
NSW has the most investment opportunities, according to ME Bank, but a Brisbane suburb has taken out the top spot. ...Read more
Property
CBA forecasts 10% house price drop for 2023
The Commonwealth Bank is the most negative of the majors on property prices. ...Read more
Property
Buying an apartment? Ask this first
If you’re looking to buy an apartment, there are a few things you need to consider. ...Read more
Property
What to look for in a rentvesting apartment
Rentvesting demands potential property investors think more strategically about their purchases. ...Read more
Property
FHBs should weigh the pros and cons before buying an apartment
If you’re considering an apartment as your first property purchase, you probably aren’t the only one. ...Read more
Property
Why first home buyers might want to consider an apartment over a house
Cost and location can play in favour of first home buyers when it comes to apartments. ...Read more
Property
1 in 2 Aussies can’t afford an interest rate rise
Aussies are increasingly unlikely to meet their loan commitments if rates lift, new research has shown. ...Read more
Property
Ageing homes account for one-fifth of Australia’s emissions
Almost eight million Australian homes remain energy-inefficient, leading to calls for a large-scale redevelopment program. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
