We are still looking for moderate growth in the US, the European recovery is gathering pace and Japan is gradually improving. Emerging economies remain under pressure and the China slowdown has further to run.
In the US, we may see a rate rise before long and a higher US 10 year Treasury yield over the next 12 months. A forecast of 2.5% US GDP growth is not unreasonable, although the upside for US equities may slow with lower corporate profits due to operating costs and the rising dollar. However, expect US equities to outperform US Treasuries over the next year.
Australia is increasingly feeling the pressure of slower Chinese growth through low commodity prices. This pressure is being partially offset by accommodative monetary policy which has largely benefited the housing sector. We see the Australian economy experiencing slowing growth and a flatter housing market. The falling Australian dollar will assist the local economy although the benefits of a more competitive currency will take time to show.
Other equity markets such as Europe and Japan are expected to be better performing. In the Eurozone, GDP growth should improve with growth in corporate profits and supportive central bank policy. We believe equity market valuations are attractive.
The China situation has provided much of the market’s recent volatility by reporting weaker economic data and input from the Chinese government to stabilise the local sharemarket. China’s economy is experiencing a slowdown, but during 2016 it should stabilise and recover to around 7% GDP growth as policy stimulus takes effect. There is policy stimulus planned in the form of monetary easing, currency devaluation and public sector infrastructure projects. The China slowdown is having a knock-on effect across other emerging economies.
Medium-term outlook for the US and global economy is still positive and global equities should deliver moderate returns.
Market pullbacks could be an opportunity to add more equities exposure to portfolios.