This year has seen risky assets deliver strong returns and global economies growing synchronously. In this month’s edition, we look back on various headlines of 2017.
The S&P/ASX 200 briefly breached the 6000-point mark before falling slightly under again with returns just slightly positive over the past few weeks as the market continues to grapple with the psychological level.
The US S&P 500 continues to make new highs and was the best performing developed market for the month, rising more than 2% above the 2,600-point mark as optimism around tax reform in the US returned to the fore. In Europe however, equity markets tracked lower despite the generally positive performances elsewhere around the world.
Elsewhere, US bond yields continued to push higher while Australian bond yields were slightly lower. Australian bond yields are still currently higher than the US, but this spread has shrunk significantly and could have implications on the AUD if the spread reverses from positive to negative.
Australian employment figures were weaker than expected this month, but previous months’ figures were revised upwards, sending the unemployment rate lower to 5.4%. Building approvals and construction work in Australia also showed the Australian economy in a more positive light as both surprised to the upside. However, these figures are volatile and further positive economic data is required to convince that the Australian growth rate can start to rebound.
In the US, robust growth seems to continue as business surveys and consumer data were positive, and inflation looks to be improving in both consumer and producer surveys. With the US CPI reading at 1.8%, just shy of the 2% target, the new US Federal Reserve Chair, Jerome Powell, has indicated for continuity of the US rate hike path and announced the target for the US Federal Balance Sheet of US$2.5 to US$3 trillion over 3 to 4 years.
The US Senate also passed a version of the tax reform bill, however the bill still needs to be passed by the House of Representatives and there is still work to be done here and concerns to be addressed. The Senate passed the bill through a marginal majority of 51 to 49 votes and with a raft of last minute changes and details that has yet to be analysed by the Joint Committee on Taxation. The Senate bill also has several differences to the bill going through the House of Representatives. The differences need to be reconciled which could pose further problems for lawmakers.
Meanwhile, China continues to deliver figures in-line with expectations, continuing to dispel fears of a Chinese slowdown which could spill over to other economies.
2017 – Risky assets deliver
After the year of reversals in 2016, 2017 was a year of continuation in the trends that 2016 ended with.
Following a strong November and December, risk assets continued to perform strongly throughout 2017. Global equity markets have returned in excess of 20% thus far. On the other hand, defensive assets provided a weak but still positive return for investors as yields rose only gradually throughout the year.
There was a calm optimism throughout the year, as exhibited by various volatility measures that remained extremely low throughout the year. This stemmed from a ‘Goldilocks’ environment of synchronised global growth that was strong, but not strong enough to spur inflation too high. Even a variety of political risks such as Trump vs North Korea, and the failure of the UK in Brexit negotiations thus far, were unable to derail sentiment.
The worries in 2016 of a China-led slowdown ended up abating. China stabilised its growth in 2016 with short-term stimulus measures, and spent most of 2017 going through an organised and orderly de-leveraging process. While the risks that this de-leveraging process could still derail growth in the world’s second-largest economy, China has so far managed this well.
At the same time, some emerging economies that were facing trouble in 2016, such as Brazil, were boosted by the rest of the world and returned to growth. This led to all 45 countries in the Organisation for Economic Co-operation and Development (OECD) posting positive growth rates synchronously for the first time in many years.
Inflation also seems to be rising after years of weak readings, and central banks are finally seeing some hope of reaching their various targets. Wage pressures have also been building although increases have yet to flow through. These are all indicators of good health for global economies.
The political environment in 2017 has certainly been eventful despite the populist movement stalling. Trump threatened global trade while promising huge stimulus and tax reforms but has delivered nothing yet, with tax reforms the closest to being implemented. North Korea provoked enemies to the point that its own allies have been aggravated to the point that China has supported sanctions on the country. In Europe, Brexit remains a mess with UK lawmakers making no progress on negotiations, while Merkel saw her position weaken despite being re-elected.
On the central bank front, the US Federal Reserve has a new Chair in Jerome Powell, and has started reducing its balance sheet alongside raising rates, and the European Central Bank has started to taper its quantitative easing program.
Meanwhile, although technology companies seem to have taken over the world, at least according to the stock market, 2017 has also seen some major backlash on these companies, ranging from inquiries into their involvement in the US elections to major fines from governing bodies.
The ‘Goldilocks’ environment may well continue in 2018, but with the major events such as the US tax reform on the horizon, this could end up pushing the global economy in the too hot basket. On the other hand, the US Federal Reserve unwinding its balance sheet, a more restrictive monetary environment from rising interest rates and tapering of stimulus elsewhere could push the global economy back into the too cold basket. Furthermore, valuations are above historical measures and investors need to be more cautious with how much they are paying for an asset.
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