Jamie Nicol, who leads the investment strategy at Australian-based DNR Capital, says there are three reasons for investors to remain optimistic about their returns in the 2017/18 financial year, adding that a number of market trends (including the rising price of Aussie commodities) supports a positive outlook.
“In assessing the outlook for the Australian market, we are thinking about three key reasons that impact the global growth outlook; the potential for inflation to raise its head, the pressures on the consumer in Australia, and the political environment,” he said.
These three factors are supported by a number of trends within the market, Mr Nicol said, such as strong US manufacturing data and continued improvement on the same metric in Europe.
Valuations for domestic equities look fair, Mr Nicol said, and reflect the fact business conditions (excluding for retail and manufacturing) have been improving since December 2016.
“The domestic market provided a small return for the month of June with the S&P/ASX 200 Accumulation Index up 0.17 per cent, but overall the 2017 financial year closed up strongly at 14 per cent,” he said.
However, Mr Nicol cautioned that the outlook for the Australian economy is currently “mixed”, with the recent strength in industries like mining and travel being offset by low consumer confidence levels and high household debt.
“There are mixed signals for the domestic economy, and an opportunity for judicious portfolio positioning to add value,” Mr Nicol said.
“We expect housing prices to at least moderate, which creates some risks for the domestic economy.
“At odds to this is that business confidence is strong. We are seeing a pick-up in mining activity, travel remains strong, export sectors like agriculture and tourism are performing well, and infrastructure projects are accelerating.”
Political risks and the possibility of a major interest rate shift remain potential problems for investors as such a change could see “some destabilisation and a rotation in leading companies in the market,” Mr Nicol said, but otherwise the market looks healthy.