Macquarie Wealth Research
Tuesday 07 November 2017
Investment Matters: November 2017
Macquarie Wealth Research
Shining a light on the global economy
Equity markets had a good run in October with most indices showing a strong positive performance. Australian equity finally broke out above its trading range and was unexpectedly strong, driven by the supportive economic conditions, locally and globally, and a weakening Australian dollar.
US equity continued the strong run despite weather-affected jobs growth data that was likely a one-off aberration. Wider economic conditions are supportive and there is widespread anticipation of corporate tax cuts that will give a further boost to earnings and the wider economy.
China’s 19thNational Party Conference took place during October, the main outcome from which was a consolidation of power for the current leadership under Xi Jinping. So far little has emerged in the way of any new structural reform agenda, but the stronger mandate of the current leadership is likely to give greater impetus to seeing through the existing raft of reforms.
Below we express our shorter term market views which may help assist investors in determining their asset allocation.
- Australian Equities. This month we have moved to a neutral weighting (from underweight) in Australian equities. The market has had some positive momentum and fundamentals generally look solid. The market is not cheap but there continues to be a generally supportive economic foundation.
- International Equities. This month we have moved to an overweight view on international equity. Whilst the market overall is not cheap, there are generally solid macro conditions, a still-supportive economic cycle and benign inflation expectations which we believe will be helpful for continued performance across many of the markets in this sector.
- Fixed Interest. We suggest an upgrade here from ‘strong underweight’ to ‘underweight’. We still expect headwinds for government bonds from rising interest rates, but with US yields having risen notably over the month, this headwind is less strong. However, credit conditions remain benign and generally supportive although we are cautious given how tight credit spreads have become.
- Cash. This month we are recommending taking the overweight cash position back down to strategic weighting. This is mainly driven by the benign and largely favourable environment for growth assets. While there will likely be continued bouts of geopolitical risk that cause market uncertainty, the likelihood of a serious market event remains unlikely. Cash is beneficial for optionality in the event of unexpected market stress so we suggest maintaining some cash in a strategic weighting.
- Property. This remains an underweight preference given the sensitivity of this asset class to expected rising interest rates.
- Alternatives. We retain our positive view to this blend of heterogeneous but diversifying strategies which we expect to continue delivering good relative performance.