Some certainty returning to markets
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Don Williams is the chief investment officer of Australian equities manager Platypus Asset Management.
While many things still remain uncertain in the financial and economic environment globally, at Platypus we are starting to feel slightly more definite about some aspects of financial markets.
Of course it is always risky to get out the crystal ball, but here are some predictions for the next few years that we're feeling relatively comfortable with.
Predictions around the eurozone, China and commodity prices
The eurozone will stay intact but growth will be anaemic - less than 1 per cent - while the US will grow at around 2 per cent. We see both Europe and the US flat-lining at these respective growth rates for a number of years.
China will continue to manage its growth rate at lower levels as it rebalances away from investment to consumption. We are not anticipating any major policy changes from the central government.
In Australia, growth will accelerate to around 3.5 per cent, up from the post-GFC average of 2.5 per cent, on the back of more benign interest-rate settings and a gradual improvement in business and consumer confidence.
We believe the easing cycle is over and the cash rate will remain at 3.5 per cent. At the same time, the Australian dollar will remain stubbornly high, supported by central banks and investors chasing yield. Average commodity prices will continue to decline but overall will remain at relatively high levels
Based on these views, our outlook for the Australian index is that the two main sectors - resources and banks - will experience very different fortunes.
The recent rally in mining stocks has fallen away at time of writing, due to a steep decline in the iron ore price. The rally was based on the view that China will increase its stimulus measures, and that the US and Europe will do something similar over coming weeks.
Banks are unlikely to deliver a spectacular performance over the next 12 months or so, but nor are they likely to be much of a drag on the index.
While they haven't generated a capital return for investors since 2009, they could be close to a turning point. Australian bank yields remain well above the historic range, and with investors struggling to find reasonable and reasonably safe returns, Australian banks are likely to garner support.
Money is likely to flow into the banks for several reasons:
- they are a stable oligopoly that has pricing power,
- their balance sheets are in good shape compared to the vast majority of northern hemisphere banks,
- Australia is seen as safe relative to Europe and Asia,
- they seem to have the implicit support of the government and the Reserve Bank of Australia, and
- the current level of earnings and dividends seems, at worst, sustainable.