The strong upward trend in Equity markets continued this month with International markets up 4.3% (MSCI world $AU) and the Australian market finally keeping pace with a 4% rise.

On the economic front US data remains strong with strong business conditions PMIs, a rebound in new home sales, solid gains in durable goods orders pointing to solid business investment and ultra-low jobless claims. While GDP growth came in at 3% annualised in the September quarter, private demand growth slowed, partly due to the hurricanes, however looks likely to bounce back strongly in the current quarter. September quarter earnings reports have continued to surprise on the upside, with 79% beating on earnings and 68% beating on sales.

Eurozone business conditions PMIs remain strong (up for manufacturers and down for services) and the German Ifo Business Climate Survey has almost reached its highest level since 1969.
Japanese core inflation remained at 0.2% year-on-year in the September quarter which is well below the Bank of Japan’s 2% target, ensuring its ultra-easy monetary policy will continue.
Chinese home prices were flat in September under the influence of property cooling measures, but industrial profits surged 27.7% which is consistent with strong growth. China’s Communist Party Congress saw an enhanced authority for President Xi Jinping, as evident in the new seven-member leadership team, the absence of any heir appointed in the team and his “Thoughts on Socialism with Chinese Characteristics for a New Era” being enshrined in the Party’s constitution. However, we continue to expect a continuation of the recent direction in policy rather than a big shift in direction.
In Australia, the High Court’s disqualification of four senators and the Deputy Prime Minister (PM) from sitting in parliament due to their dual citizenship has led to an increase in political uncertainty.
Australian inflation surprised again on the downside in the September quarter, producer prices were weak and import prices fell – Reserve Bank of Australia (RBA) rate hikes are still a way off. Our view remains that the RBA won’t raise interest rates until late next year, as it will take a while for a gradual pick-up in economic growth to flow through to wages growth and higher underlying inflation. RBA Deputy Governor Debelle’s reference to sizeable spare capacity in the labour market and flat Phillips curves implies ongoing RBA concern about low wages growth.
After a strong run US shares are overdue a correction, but looking beyond short-term uncertainties we remain in a sweet spot in the investment cycle – with okay valuations particularly outside of the US, solid global growth and improving profits but still benign monetary conditions – so we remain of the view that the broad trend in share markets will remain up. Australian shares are likely to continue to participate in the global share rally, but remain a relative laggard thanks to a more constrained earnings outlook. Residential property price growth in Sydney and Melbourne looks to have peaked with a slowdown likely over the next year or two.
Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.25%.
With the RBA on hold for the next year or so and the Fed on track to hike in December with another three or four hikes next year the interest rate differential will continue to move against Australia, which should result in further weakness in the A$.