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Standing ovations, now delivery is the key

Peter Warnes  |  03 Mar 2017Text size  Decrease  Increase  |  

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The expectations now confronting President Trump are stratospheric, Morningstar's Peter Warnes says, with the funding of large spending plans set to test the resolve of Congress.


Global equities markets roared in the aftermath of President Trump's speech to the joint houses of Congress, which drew 94 standing ovations. A repeat of and resolute commitment to his election platform resonated with investors, as did a more conciliatory tone.

Expectations of delivery are now stratospheric. Investors are investing in the future, and with markets in territory not visited before, it is now incumbent on Trump and Congress to deliver.

While at least half the members stood and then sat 94 times during Trump's speech, Democrats mostly sat silent and still. Trump was effectively tearing down what they had built over the past eight years.

But it appears Trump may have convinced his non-supporters in the Republican Party to get behind him, making it easier to deliver on his promises. But while the speech was about making America great and safe again, little detail was provided.

To be fair this was not the time for detail, it is just five weeks since Trump was inaugurated. It was a rallying call, effectively an address to the nation--this is how it is going to be. Trump asked the American people to trust him. Right now, my cautious near-term stance appears wrong and in tatters.

There will be challenges. The funding of large spending plans around infrastructure, taxation, health, defence, and social security will test the resolve of Congress.

US interest rates are headed higher. It is likely the Federal Reserve will move at its 15 March meeting. Bond yields reacted, moving higher, increasing mortgage rates. Trade relations will be tested. Trump reiterated fair trade, not free trade, seeking a level playing field.

Closed US coal mines will be re-opened. Lower energy costs are critical in increasing competitiveness on the global stage. Are Australian politicians listening?

Australia's growth rebounds

The Australian economy avoided a technical recession with a stronger-than-expected quarter-on-quarter (q/q) rise of 1.1 per cent in real GDP in the December quarter. The rebound quickly put paid to the unrevised 0.5 per cent contraction in the September quarter. GDP growth for 2016 was 2.4 per cent, up from 2015's 2.0 per cent.

Solid gains in household consumption, which rebounded from 0.4 per cent q/q in 3Q to 0.9 per cent q/q in 4Q, and private investment in addition to a record December trade surplus, which drove the net exports component higher, combined to lift the country's economic growth.

Dwelling and business investment components were positive contributors at 1.2 per cent and 1.6 per cent q/q, respectively.

Mining investment surprised with a positive contribution, supporting the business investment segment. That is unlikely to repeat in 2017, with mining capital expenditure forecast to fall for at least the next 12 to 18 months.

While household consumption grew strongly, household income growth was weak at 0.2 per cent q/q. Consumption has been supported by a fall in the savings ratio from 6.3 per cent in 3Q16 to 5.2 per cent in 4Q16. This is unsustainable and points to much weaker consumption growth in 2017.

The record grains harvest boosted the farm sector, while the non-farm sector lagged headline growth.

Corporate profits reflected the surge in the terms of trade, boosted by higher commodity prices and solid volumes, particularly in iron ore and coal, with LNG exports also very supportive. But as we all know these gains, based on higher prices, can dissipate as fast as they appeared.

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Peter Warnes is Morningstar's head of equities research. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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