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Will it be smooth sailing for share markets in 2018?

3 hot topics for Australian investors

We take a look at why share markets have been on a roller coaster ride, Australian companies’ half year earnings, and if there’s a trade war, how will it affect you?

Will share markets repeat the February scare?

Global share markets got the jitters in February, as investors started to factor in the potential for interest rates in the US to rise more quickly.

The S&P 500, an index of US stocks, fell around 8% in a week, which was quite dramatic given the relative stability in markets of the last year or so.

By the end of the month, the index had recovered a bit over half of its losses, but it was still the worst month for global shares in 2 years.

Markets had been so calm for so long that, to some degree, complacency had taken hold.

So why was there such a big reaction?

Well, markets had been so calm for so long that, to some degree, complacency had taken hold.

A small loss turned into a bigger loss, and investors who weren’t really expecting volatility, sold more shares... which only made things worse.

The fundamental backdrop for shares this year still looks pretty good though... but we do expect that we’ll see more of that volatility than we saw last year.

Solid Aussie company results, but what about future earnings?

February is reporting season for a lot of Australian companies, releasing their results for the first half of the financial year.

Overall, it’s been a bit better than average, with around 80% of companies meeting, or beating, expectations. Only 4% of firms reported a loss*, which is the lowest level since 2007.

Despite this solid reporting period, many companies have faced escalating costs.

A key watchpoint for the outlook is how wage growth and the housing market develop.

While reported revenues have been higher, it has also come with higher-than-expected increases in a broad range of costs, leading to a small decline in net margins.

A key watchpoint for the outlook is how wage growth and the housing market develop. Growth expectations are relatively modest, so we’re not overly concerned. But as with global shares, it’s probably not going to be smooth sailing.

What's the impact of a trade war on consumers?

In early March, President Trump announced large new tariffs would be imposed on US imports of steel and aluminium.

At this early stage it is difficult to foresee the ramifications of this step towards protectionism, but the initial reactions from trading partners suggests that retaliatory action is not out of the question.

A trade war, if that is where this ends up, would have a negative impact on growth and jobs, and would lead to higher inflation.

There have been winners and losers from globalisation, but generally speaking, freer trade benefits the US and the global economy. A trade war, if that is where this ends up, would have a negative impact on growth and jobs, and would lead to higher inflation.

The effects would be felt in the US, as well as across the globe, and particularly here in Australia. It wouldn’t be in anyone’s interest for this to happen, so, hopefully, sensible heads will prevail.

*Source: Goldman Sachs

Economic report

Economic growth in Australia was marginally below expectations with households appearing stronger, based on fourth-quarter GDP figures released by the ABS on 7 March 2018.

Household spending was higher, almost 3% above that of last year. This was largely due to stronger jobs growth in the labour market and lifting household confidence.

Business investment has improved and is broadening out into more industries. This however is offset by a slowdown in housing investment, after a period of stronger growth.

Government spending contributed strongly to economic growth, with an increase of 4.9% year-on-year. A long pipeline of infrastructure projects suggests this will continue in the year ahead.

Export growth was weak in Q4 due to a once-off decline in quarterly service exports.

Overall, the Australian economy is continuing to transition towards non-mining and non-housing growth. Household dynamics appear to be stable with low inflation and modest income growth.

Our expectation is for the RBA to keep rates on hold for 2018 and will not entertain a lift in rates by at least mid-2019.

Aware Super Pty Ltd ABN 11 118 202 672, AFSL 293340, the trustee of Aware Super ABN 53 226 460 365. Financial planning services are provided by our wholly owned financial planning business Aware Financial Services Australia Limited, ABN 86 003 742 756, AFSL No. 238430.

This information is of a general nature only and is not specific to your personal objectives, personal situation or needs. Before making any decisions based on this information you should consider its appropriateness to you. Every effort has been made to ensure the information is accurate. We strongly recommend that you consult a financial planner before taking action and review the relevant Product Disclosure Statement.

Past performance is not an indicator of future performance and future performance is not guaranteed.

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