Initial market falls precede stronger returns

01_Initial market falls precede stronger returns

Dr Shane Oliver
AMP Capital
Chief Economist and Head of the Investment Strategy team

In 2016 we’re looking for global sharemarkets to provide stronger returns than what we saw last year. Despite the sharp falls we’ve already experienced – caused by increased China fears and ongoing US Federal Reserve rate hike concerns – we see shares trending higher due to this asset class being relatively inexpensive compared to bonds and bank deposits, and easy global monetary conditions.

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Market outlook

Although we do expect continued volatility throughout the course of 2016, we also anticipate global growth to continue and monetary conditions internationally to remain easy. Both of these factors are going to keep shares relatively cheap compared to the alternative of bank deposits. Valuations also look to be reasonable – and when you allow for the emergence of global growth –we’re expecting returns of around 7-9%.

Interest rates

Interest rates are expected to remain low in 2016. Global growth is still constrained due to low inflation in the US, monetary and quantitative easing in Japan and Europe and further rate cuts in China. Australia’s economic growth will remain below potential, with the Reserve Bank cutting interest rates again as a consequence.

Australian property market

The Australian property market solicits a different outlook across the various capital cities. Current price declines have been ensuing for some time in Perth and Darwin, while Hobart, Adelaide, Canberra and Brisbane have experienced modest growth. We’ve seen a lot of strength over the past few years in Sydney and Melbourne however, Australia’s two most populated cities are now also experiencing a slowdown – this is due to regulation measures placed on banks to slow down lending to property investors and an increase in bank interest rates. We estimate gains of property prices nationwide over the next 12 months to average around 3-4%.

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