After a tumultuous 2016, the share market has had a solid start to the new year prolonging the so-called ‘Trump Rally’ which has seen Australian equities rally more than 10.0% from their intraday lows on 9 November when Trump was elected. With the year now underway and reporting season around the corner, it is pertinent to consider the factors that will influence the share market in the year ahead and provide Wilson Asset Management’s predictions for 2017.
The bull run
First, however, it is germane to consider the outlook for the share market in the context of its performance in recent years. In our view, we are now in the later stages of the current bull market. It is almost eight years since the share market plumbed its post-GFC depths in March 2009 marking the start of the bull market.
However, Australia’s bourse is still some way off its pre-GFC high of 6,821 points reached on 1 November 2007. In comparison, in the US the Dow Jones and S&P 500 indices have exceeded, and are now trading considerably above, their pre-GFC highs.
1. Australian economy to improve
Particularly towards the end of 2016, the Australian economy started to show signs of strength, and in 2017 we expect continued economic growth, albeit modest. With the rise in commodity prices increasing the taxable income of many mining and mining-related companies, the government is set to receive a fiscal boost this year. Similarly, with the property market remaining strong, many state government coffers will benefit from stamp duty and land tax revenue.
2. Shares to rise
With the Australian and global economy strengthening, our overall view of the market for the next 12 months is bullish. The consensus outlook is similarly upbeat with analysts forecasting the market will rise 8.0% this year. The one factor which we think could lead shares higher this year is the return of company earnings per share growth in select sectors such as resources. In 2017, despite our generally positive view, we anticipate continued volatility in equity markets given the high degree of uncertainty surrounding the implementation of President-elect Trump’s election policies.
3. No more rate cuts
The RBA’s more hawkish stance, together with indications the Australian economy is strengthening, signal an end to the interest rate loosening cycle. While official rates are set to remain at or around record lows in the near-term, we are expecting the next move for interest rates will be up. In our view, the RBA will not raise rates until later this year or early next year.
4. Housing market to remain strong
With Australian house prices (particularly on the east coast) stimulated by record low interest rates for a number of years now, we believe the housing market has reached its peak. Our view is that residential property will normalise in calendar year 2017 away from their above average returns in recent years. Contrary to the doomsayer predictions, however, we do not expect the residential property market will crash. We expect the market will remain quite robust over the next 12 months supported by low interest rates and a persistent undersupply of dwellings, particularly stand-alone homes, as supply fails to keep pace with population growth.
The notable exception to our otherwise positive view is the apartment market. We believe caution is warranted in this segment of the market given the considerable supply of apartment dwellings coming online.
5. Resources to outperform, while industrials remain weak
With higher commodity spot prices, particularly coal and iron ore, we expect earnings growth to be strong in the resources sector in 2017. This outlook is contingent Chinese economic growth which in 2016 was driven by government stimulus measures.
In contrast, we expect the share prices of industrial companies will be weaker a relative sense, and as such remain a stock pickers market in that sector.
6. Yield trade fades
With interest rates at record lows for many years, investors abandoned term deposits and went on the hunt for yield among stocks with high, reliable dividends such as REITs, banks and infrastructure companies. However, with interest rates on the rise the yield trade will continue to recede in our view.
7. Aussie dollar to strengthen
The value of the Australian dollar fluctuated in 2016 trading as low as 68 cents against the greenback and is currently fetching around USD75 cents. Unlike most commentators, we anticipate the Aussie dollar will strengthen as the resources sector improves and interest rates rise. Currency fluctuations always give rise to winners and losers with a stronger Australian dollar an obvious boon for import businesses, while a disadvantage for local tourism operators.
8. IPO pipeline weak
We expect the pipeline of new companies coming to market will continue to wane this year given private equity firms have now sold off the majority of their assets and have transitioned to acquisition mode. The quality of businesses listed in recent months has generally been poorer than one to two years ago with many new companies failing to trade above their issue price, and some trading considerably lower. Traditionally, the quality of new IPOs is generally highest at the start of the bull market cycle and, as we near the end of the current cycle, the quality of new company floats is generally diminishing.
9. Large caps to outperform small caps
After a spectacular rally by small cap stocks in recent years, we expect large companies will outperform their smaller counterparts in 2017. The strength of small-cap stocks started to wane as valuations reached unsustainably high levels and there is not the earnings per share to justify the high PE multiples smaller companies are currently trading on. Notably, over the last few months small-caps have significantly underperformed relative to large-caps.
10. Global reflation
With the global economic recovery gathering pace, Credit Suisse analysts predict global nominal GDP will increase by 6.8% this year (2016: 5.6%), the fastest rate in six years. With some of President-elect Donald Trump’s policies predicted to have a stimulatory impact, the low inflation era is likely drawing to a close. The large rally in bond yields recently is a clear indication of this.
Contributed by Wilson Asset Management: (VIEW LINK)
Chris is the Chief Investment Officer of Wilson Asset Management, having joined the company in 2006. He is also the Portfolio Manager responsible for WAM Capital (ASX:WAM), WAM Research (ASX:WAX), WAM Active (ASX:WAA) and WAM MicroCap (ASX:WMI).