Share markets around the world rose modestly in August with the ASX 200 up by 0.7% and The MSCI in $AUD rising 0.8%.

While the noise continues around global investment markets – with Trump, North Korea, Hurricane Harvey, etc - global economic indicators continue to point to solid and improving global growth and rising profits but constrained inflation which will keep central banks supportive. All of which tells us we are still in the “sweet spot” in the economic cycle, an environment that remains positive for growth assets despite the risk of occasional corrections. Although the August payroll report in the US was a bit on the soft side with payrolls up a less than expected 156,000 and unemployment up slightly to 4.4%, trend jobs growth remains robust and a very strong reading for the August ISM manufacturing conditions index of 58.8 (including for employment plans) tells us that the US economy and underlying jobs market remains strong.
 
US economic data remains strong. June quarter GDP growth was revised up to 3% annualised (from 2.6%) thanks to stronger business investment and consumer spending, the August manufacturing conditions ISM rose to a very strong reading of 58.8, consumer confidence rose in August to around its highest since 2000 (despite all the Trump-related political noise), consumer spending rose solidly in July and home prices are continuing to rise. While payrolls growth was less than expected in August this looks like noise with most other jobs indicators, including jobless claims and employment plans in the ISM survey, all very strong. All of this will keep the Fed on a tightening path, but continuing low inflation at just 1.4% on a core basis in July and wages growth of just 2.5% will keep it gradual.
 
Eurozone economic data is also strong with confidence rising in August to levels last seen before the GFC driven by both consumer and business confidence. It's even up and solid in Italy! However, unemployment remains very high at 9.1% in July and core inflation remained well below the 2% "target" at 1.2% in August. All of which will keep the ECB “patient”.

Japanese jobs data remained strong in July with the ratio of job vacancies to applicants at its highest since 1974 (helped by Japan’s falling workforce) but household consumption data was weak. Industrial production fell in July but after a strong June and annual growth remains around 5%.
 
Chinese business conditions were mixed in August - up for manufacturers, down a bit for services - and profit growth slowed a bit in July all consistent with some slowing in Chinese growth in the current quarter, but not much.
 
As always – it’s not all good news globally. The Indian economy has slowed (to 5.7% year-on-year in the June quarter) with the July GST start up also impacting. That said a rebound in its manufacturing Conditions PMI in August is a positive sign that GST disruption is short lived.
 
The June half earnings reporting season in Australia is now done. The good news is that profits and dividends are up with 67% of companies reporting higher profits than a year ago (see the first chart below) and 64% increasing dividends from a year ago which is a good sign regarding the quality of earnings. Overall, earnings per share growth for 2016-17 looks to have come in around 17.7% which is a huge improvement after two years of declines. However, looking beneath the surface it’s not quite so good. First, the huge upswing in earnings owes to a 124% rise in resource sector profits and there is no doubt that the turnaround here is impressive and reflecting this they have increased their dividends substantially. However, profit growth in the rest of the market is more modest at around 6%. What’s more, only 39% of companies have surprised on the upside (which is less than normal and the weakest since 2013) and 31% have surprised on the downside. Outlook guidance has also been a bit soft. All of which partly explains why the share market fell fractionally in August. 5% of companies saw their share price outperform the market the day they reported but beneath the surface there has been intense volatility with some very sharp declines in share prices for companies who disappointed (eg Domino’s, Telstra, Suncorp, QBE, Bluescope, Healthscope, Harvey Norman) either in terms of the result, outlook comments or dividends. The problem of course is that PEs are relatively high and so much had already been factored in. As a result, expectations for earnings growth for the current financial year have been revised down a bit to 2.3%, although again it’s worth noting that profit growth for the market excluding resources is expected to remain relatively stable at around 4.3%. Key themes have been: large caps doing better than small caps; resources stocks back to strength; constrained revenue growth with the domestic economy just okay with housing still strong but retailing mixed; some disappointment from foreign earners; dividends (ex Telstra) continuing to roar ahead; and indications of stronger business investment. 
 
While underlying profit growth for Australian listed companies (ie, excluding the volatility in resources earnings) at around 6% is all right – it’s well below that in the US (at around 11%) and Europe and Japan (at around 30% lately) so it’s another reason to maintain a bias towards global shares over Australian shares.
 
 

 
Share markets remain at risk of a further consolidation/short term correction. Although the risk of a US Government shutdown and debt ceiling crisis have receded a bit, US politics generally, North Korea and central banks remain potential triggers and we remain in a seasonally weak part of the year. However, with valuations remaining okay – particularly outside of the US, global monetary conditions remaining easy and profits improving on the back of stronger global growth, we would see a pullback as just a correction with the broad rising trend in share markets likely to resume through the December quarter and into 2018.  

National residential property price gains are expected to slow, as the heat comes out of Sydney and Melbourne.
 
Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.5%.