Global economic outlook points to a sustained recovery in share markets

Investors have experienced continued volatility in share markets this year, with some media articles urging investors to ‘sell everything’ only worsening the situation.

Nonetheless, economic data has remained largely positive and as a result investor sentiment may have shifted somewhat towards the positive since then. But the lack of a sustained rally in share markets to date indicates investors remain a little cautious.

This is partly due to ongoing concerns about the Chinese economy weakening beyond expectations (‘hard landing’) and a possible faltering of the US and EU economic recoveries. Social and geopolitical tensions in Europe and ongoing debate about European Union membership (Britain/Greece’s possible exit) have also stunted rallies.

In our view, the global economic recovery should continue, with fundamentals remaining mostly stable which should lead to a more positive mindset from investors (and the media).

Global economic recovery to be driven by China, US, Europe and India

Key findings of the April 2016 “The Global Economic Outlook” published by the Conference Board, a global independent business membership and research association working in the public interest, conclude that global growth is likely to remain positive for the next few years and that a recession is unlikely.

While China’s economy is expected to experience a similar growth rate to current 6% plus levels, the report predicts that the Euro area should improve greatly, the US should continue on the path to recovery and India should also be a key driver of global growth.

Global market indicators and economic fundamentals are not suggesting any major deterioration in the global economy for the near term. Recent manufacturing trends and consumption patterns in the US have been better than anticipated. In particular, factory and survey data in the manufacturing industry rebounded strongly in February indicating that recent softness was not suggestive of prolonged weakness.

Furthermore, the lower oil and gas prices and strong labour force figures continue to translate positively to consumer spending.

In the US, unemployment levels remain below 5% p.a. and the participation rate has also started to increase (people returning to the workforce or at least looking for work with the prospect of finding it). Wage growth is showing signs of life and last month there were also signs that inflation has started to trend up.

Late last year, China’s premier Li Keqiang made an important announcement committing China to achieve an economic growth target of ‘at least 6.5% p.a.’ over the next five years. Although this was below previous targets of greater than 7% p.a. growth, the assertion has proved positive for global markets.

The continuing transition by China to a consumer driven economy is not likely to be without its challenges. China will continue to experience some turbulence but we do not view a ‘hard landing’ as a likely outcome at this point.

European economic growth rates have proved resilient, though modest, in the face of difficult circumstances. Massive migration, an oil price shock and emerging market weakness have been navigated. The risk that ‘Brexit’ (i.e. the United Kingdom’s possible withdrawal from the European Union) poses to European trade links is one that cannot be discounted but opinion polls suggest that Britons will vote to retain membership in the European Union. As industrial production growth continues, an environment where trade remains open will aid a continued recovery.

It is expected that global markets are also poised to benefit from continued strong Indian economic growth. In its latest Global Economic Outlook (GEO), Fitch Ratings reported that “Growth is expected to gradually accelerate to 7.7 per cent in FY’17 and 7.9 per cent in FY’18”, leaving India at the top of the growth ladder. These continued high growth forecasts are expected to result from planned government policy changes which should liberalise the Indian economy and promote foreign investment.

The influence of Asia growing as Silk Road trade route improves

Last year the world was heavily focused on the path of US interest rates but the strength of Asia is arguably more important for the global economy and markets. According to the International Monetary Fund (IMF), the Asian region today accounts for approximately 40% of global production (GDP) but more importantly approximately 65% of the growth in global GDP.

The interconnectedness of the Asian region is primed for further improvements as the region’s infrastructure investment, led by China’s One Belt One Road policy (a policy designed to develop a huge economic belt, based on those countries along the ancient Silk Road trade route between Asia and Europe) continues to roll out, as shown in the diagram below.

Source: CLSA

Asian economies have started to experience clear benefits from this interconnectedness especially with the rapid growth in the Chinese middle class consumer. Evidence of the growth in the Chinese middle class is demonstrated in part by the growth in Chinese outbound tourism (see chart below), which has increased markedly to Thailand, Japan, Korea and Australia, and this trend is forecast to continue.


Summary and Outlook

Overall, we expect that investor sentiment should continue to improve globally on the back of sound economic conditions and this will aid recovery in share market prices.

We expect volatility to continue to be a feature of financial markets for some time, but remain optimistic over the longer term for Australian and global share markets.

A slow grind recovery is our central expectation.

Active management of risk and proactive asset allocation remain highly important in the current market setting.

by Jeff Mitchell, Head of Investment Research, Australian Unity Personal Financial Services

Disclaimer: This article is not legal advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every care has been taken in the preparation of this information, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Australian Unity Personal Financial Services Ltd is a registered tax (financial) adviser. Any views expressed are those of the author and do not represent the views of Australian Unity Personal Financial Services Ltd. If you intend to rely on any tax advice in this document you should seek advice from a tax professional. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in April 2016. © Copyright 2016