Summary of key points


  • The current combination of still benign monetary policy, increasingly stimulatory fiscal policy and synchronised world GDP growth will probably support equity markets through 2018 and possibly into 2019. We will continue to monitor conditions to anticipate the need to make a significant shift from growth assets to defensive assets, but this is not needed at this stage.
  • It is still appropriate to hold a neutral or benchmark allocation to Australian and International equities given the current Valuation indicators and as long as the Momentum of equity markets persists and the Qualitative factors (as set out in Table 6) remain supportive.
  • There may be events that disrupt equity markets in the short run, mainly emanating from the mercurial behaviour of the Trump administration. Policy maker mistakes are also more likely than before to come from the now more centralised apparatus in Beijing. Any resulting equity market sell offs may well offer the opportunity to accumulate equities at favourable prices, but care is needed when doing so.
  • There may even be upside surprises such as an outbreak of peace and reconciliation on the Korean peninsula.
  • One risk to watch is the approaching Australian election, which is more likely to be in early 2019. Current polling indicates that the ALP will return to government and with it the prospect of a roll-back of the Howard-Costello extension of the dividend imputation system that allowed unused excess franking credits to be claimed in cash from the ATO. If the ALP is elected to government and if they manage to get this measure through the Senate, then we should expect to see sales of the top 20 ASX stocks of which some 9% are held by SMSFs in pension mode. The sales activity would also extend to hybrids whose returns have a significant franking credit component.
  • US Bond yields are expected to rise by up to 1.5% over the next two years to reach levels above 3.5% p.a. Therefore, the defensive or stabilising part of a portfolio should be an underweight to fixed Interest and have a shorter duration position in fixed interest. In addition, given the low spread or margin available for taking credit risks, the exposure to credit risk should be very limited.



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