Can this go on much longer?

18 June 2018

Markets are not continuing on the same calm, growth-focused path they did in 2017, explains Mark Rider.

Markets have been a lot more volatile in 2018, particularly sharemarkets, but with a lot less return. 

Global sharemarkets were up 6 per cent in the first three weeks of the year but then fell 10 per cent before rebounding to being up about 2 per cent year to date. The Australian sharemarket has followed a similar up-and-down cycle.

The sharemarket has seen a combination of low returns and high volatility so what has actually changed from last year? Is it the economic backdrop? Is it to do with the inflation backdrop or interest rates?

It turns out it's all of the above. 

Inflation in the United States has gone up a bit this year rather than surprising on the downside as it did last year. In contrast, the world economy – particularly in Europe – has actually disappointed on the downside in terms of economic growth, whereas last year it surprised on the upside.

In the US, rates are now higher than last year and one of the favourite indicators of markets for the growth outlook in the year ahead – the yield curve – has actually flattened.

While the US yield curve is still well short of flagging a recession it does suggest there's going to be somewhat weaker growth in 2019.

Throw in signs of stress in funding markets and trade issues and it creates a situation where the market has embraced this year’s theme of 'letting the good times fade'.

Markets try to anticipate the future and now they're looking ahead and asking how much longer can the strength in company profits growth go on?

In the shorter term there may be a bit of a bounce in markets, so we're still looking for solid single-digit returns for equities this year.

But looking out into 2019 our thoughts are turning towards a softer economy and potentially the peak in investment markets.

Mark Rider is Chief Investment Officer for Wealth at ANZ.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.