The Australian market continued its strong performance up over 2% for the month whilst International markets (MSCI US$) were more modest returning about 0.4% for July.

The past week saw ongoing softness in global business conditions PMIs for July and the IMF revise down its global growth forecasts again. IMF forecasts for the US were actually revised up, but due to downgrades for emerging markets the IMF revised down its global growth forecasts by 0.1% to 3.2% for 2019 & to 3.5% for 2020. However, the IMF is really just responding to the same risks that markets responded to last year, it’s following the same pattern of “initial optimism then revise down” seen for much of the post GFC period and in any case 3% or so global growth is not that bad. And while global business conditions PMIs remain weak, they are still consistent with the slowdowns seen around 2012 and 2015-16 as opposed to something deeper. But they do need to bottom soon!  

And on this front, there was some good news on four key fronts over the last week. First, the US/China trade talks are finally resuming with face to face meetings in China in the week ahead and both sides offering goodwill gestures (with the US loosening restrictions on Huawei and China possibly stepping up agriculture purchases from the US). This is important as President Trump’s trade war has played a major role in depressing manufacturing confidence.
Second, the US debt ceiling looks to have been resolved relatively quickly (assuming the bi-partisan deal passes Congress and President Trump signs it). The weakening of the Tea Party, Mr Trump being less concerned about debt and spending than many Democrats and no party wanting to be seen as a spoiler (after the lessons of 2011 and 2013) have made it easier this time. The key for the economy is that another debt ceiling debacle looks to have been avoided and the agreed increase in spending caps has removed a mini ‘fiscal cliff’ that would have dragged on the economy next year. Of course, the details need to be agreed on spending to avoid another government shutdown in October.
Thirdly, while earnings growth in the US has slowed, the much-feared earnings recession hasn’t happened with June quarter earnings reports looking ok and earnings up around up 3% from a year ago.
Finally, the ECB formally signalled it was on track to join the global reflation effort. While ECB President Draghi’s comments lacked detail his comment that the outlook is getting “worse and worse” and the ECB’s statement that it is expecting rates “at present or lower levels” at least through to the first half of 2020 and that it is looking at ways to reinforce forward guidance on rates, design a tiered system for negative interest rates and options for another round of quantitative easing all leave it on track for more policy stimulus in September, with a key component likely to be a new €30bn a month QE program.
Australian share market hits an all-time high after nearly 12 years – but can it be sustained? The All Ords index has surpassed its record 1 November 2007 closing high of 6853.6 and the S&P/ASX 200 has done the same. Basically, the Australian share market is looking through short term uncertainties around the economy and focussing on lower interest rates and bond yields making shares relatively cheap, the likelihood that policy stimulus will ultimately boost economic growth, high iron ore prices boosting mining companies and a positive global lead. While US shares made it back to their 2007 high in 2013 and global shares did so in 2014, Australian shares took longer because of much tighter monetary policy after the GFC, the high A$ until recent years, the collapse in commodity prices and the fact that the 2007 high was a much higher high for Australian shares than it was for global shares thanks to the resources boom of the last decade. Of course, once dividends are allowed for, the Australian share market surpassed its 2007 record high in 2013.
Is it sustainable? Going through past bull market highs after a long period below can attract investors into the market so it could push on for a bit. But after such a huge run – the market is now up 20% year to date – it’s vulnerable to a short-term correction and the August earnings reporting season may result in some volatility. 
Low yields are likely to see low returns from bonds, but government bonds remain excellent portfolio diversifiers.
Unlisted commercial property and infrastructure are likely to see reasonable returns. Although retail property is weak, lower for longer bond yields will help underpin unlisted asset valuations.
The combination of the removal of uncertainty around negative gearing and the capital gains tax discount, rate cuts, support for first home buyers via the First Home Loan Deposit Scheme and the removal of the 7% mortgage rate test suggests national average capital city house prices are at or close to bottoming. Next year is likely to see broadly flat prices as lending standards remain tight, the supply of units continues to impact and rising unemployment acts as a constraint.
Cash and bank deposits are likely to provide poor returns as the RBA cuts the official cash rate to 0.5% by early next year.
Source: IMF, AMP Capital
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