Economic Update

Markets to rise in medium term

A senior economist has said he expects both Australian and global equity markets to strengthen in the coming six to 12 months.

AMP Capital chief economist Shane Oliver cited several reasons for his prediction during a presentation at last month’s Australian Securities Exchange Investor Day held in Sydney.

“You’re still in a world of low interest rates so the monetary environment is positive for shares,” he explained.

“Also you’ve got rising profits. Between 2014 and 2016 profits fell globally and in Australia. It was made worse in Australia by the collapse in profits of BHP and Rio Tinto and so on but that was the trend. Now you’ve got a situation where profits are rising in the US and Europe and elsewhere as growth has picked up.

“Same story in Australia but it’s been magnified by the swing up in the iron ore price and that’s helped the resources companies.”

In terms of value Oliver believes share valuations are fairly accurate.

“I think the valuations are sort of okay. They’re not fantastic, and they’re not dirt cheap anymore, but in a world of low inflation and low interest rates share market valuations are okay,” he said.

In regard to currency Oliver warned the Australian dollar may experience some depreciation during the year in response to rising US interest rates, which he forecast might pick up in frequency over this period of time.

However he advised investors to look at these developments in a positive light.

“I don’t see these rises crashing the Aussie dollar in this environment. It will just cause a gradual down trend which I guess argues to have a continued exposure to global shares,” he suggested.

“That’s because as the Aussie dollar goes down the value of your offshore holdings goes up which provides you a bit of a hedge there.”


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