The US is leading the world economy out of recovery to boom, writes Mark Rider.
The long recovery phase of the developed economies is nearing its end as conditions improve, setting the stage for the more mature boom phase of the investment cycle.
This is what indicators are pointing to in 2017, with low unemployment, inflation starting to tick up, markets posting strong returns and sharemarkets no longer cheap.
In the boom phase of the investment cycle, sharemarket returns are positive but they are more moderate than earlier strong gains. Nevertheless share returns during this phase continue to outpace cash and bond returns.
Right now there’s still some fragility in developed economies, with all major central banks continuing to foster recovery, interest rates extremely low and inflation only modestly rising. So there is still a way to go in this transition from recovery to boom before the economic and investment cycles turn down.
But none of that looks set to obstruct acceleration of growth this year. We predict it will increase 0.5 per cent in 2017, adding to the 3.2 per cent pace of the past few years – that’s across developed and emerging economies.
The net result of this mix of forces, which might best be characterised as ‘better but not great’, is that monetary policy easing cycles have ended in virtually all of our key markets of interest. All regions have lifted and a synchronised upswing is emerging. However, while the upswings are occurring at the same time, where each of them are at in the current stage of the business cycle varies widely from early boom in the US to mid-recovery in the eurozone and Japan.
Source: ANZ Wealth
We expect growth to be led by the US, where growth has not just accelerated in the second half of 2016, but become more broadly based with a rebound in dwelling construction and a waning in the sizeable drag from weaker oil and gas investment supporting growth. There are also signs building of a solid recovery in US capital goods spending.
Alongside improved growth has been a lift in overall inflation and we expect a further gradual pickup in coming months given the economy is close to full employment and growth is above trend.
This improved growth and steady inflation suggest growth assets, such as shares, will likely outperform defensive assets such as bonds and cash. This should be the case at least until the boom phase nears its end and slows down.
This is why we see Australian, New Zealand and international shares in a positive light, with our portfolios at benchmark position rather than underweight. (Bonds on the other hand are expected to result in flat returns internationally, and only slightly higher locally).
Though even when we factor in the improved outlook, sharemarket valuations across most developed markets are now moderately expensive.