Global sharemarkets buoyed by economic growth, while Australian residential property facing strong headwinds

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

The first three quarters of 2017 have been characterised by robust economic growth in major economies, continued geopolitical tensions and major markets that look through the worry and continue to climb.

Synchronised economic growth in major developed economies against a backdrop of benign inflation and low unemployment continues to be the order of the day.

As a result, most sharemarkets have continued to move higher since the start of the year. Any uncertainty or downward moves have been used by many investors as a buying opportunity.

Risks such as increasing geopolitical tensions on the Korean Peninsula, uncertainty about the implications of central banks unwinding quantitative easing and increasing official interest rates are seemingly being put to one side by investors.

Sharemarket volatility has been remarkably low against this backdrop, which has been a relief for investors.

Here is a snapshot of major economic regions:

United States: Robust economic growth, tepid inflation, growing employment and industrial production have continued despite the US Federal Reserve’s decision to begin increasing the official cash rate. This is further evidence that the US recovery is self-sustaining.

Europe: The Euro zone has managed to continue its upward trajectory economically year-to-date and in the second quarter of 2017 posted GDP growth of 2.3% year-on-year, slightly higher than the 2.2% year-on-year growth of the United States. Despite a number of challenges such as accommodating Brexit, major elections in both France and Germany and continued terrorist activity, there has been a steady improvement in key economic indicators throughout the Euro zone.

China: A resurgence in Chinese economic growth over 2017 appears in place with annualised economic growth continuing at an official rate of 6.9% annualised during the June quarter. Furthermore, the September Purchasing Managers’ Index (PMI) posted its highest gain in over 5 years with a reading of 52.4, driven by increases in new orders from both domestic and foreign demand.

Australia: Australia’s rate of economic growth slowed slightly during the June quarter with an annualised rate of 1.8% p.a. being posted, slightly down from the 2.1% p.a. previously. A robust outlook for economic growth from the world’s second largest economy, China, should provide ongoing demand for Australia’s commodity exports and help provide the economy with a buffer as economic activity in housing related sectors moderates in coming months.

Headwinds for Australian residential property build

Against a backdrop of falling interest rates over the past 25 years, household debt as a proportion of household disposable income has increased strongly.

Fortunately, interest paid as a proportion of household disposable income is not excessive – at this stage.

Nonetheless, Australia’s residential property market faces a number of challenges including the prospect of increased interest rates and house prices that are at historical highs and stretched household affordability measures.

However, it is unclear whether these headwinds will impact prices negatively or merely impede the upward movement in prices. Much will depend on the pace and severity of any increases in mortgage interest rates.

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 October 2017. © Copyright 2017