Summary of key points

  • Equity market valuations have improved in the USA, Australia and Europe as bond yields declined and long term earnings per share growth improved.
  • China is taking steps to carefully rein in its credit growth without triggering too sharp a reduction in growth.
  • In Australia the RBA left its short-term official rate unchanged at the record low of 1.5% p.a. again while the Federal Government Budget tacitly envisages larger deficits for longer.
  • The new bank levy contained in the Budget will have little if any adverse effect on bank profits and shareholder returns as they pass on the costs to borrowers and depositors.
  • In our mainstream scenario we are assuming that the ten year Australian bond yield will rise from the current 2.5% p.a. to around 3.3% p.a. This provides a buffer of safety in our forecasts.
  • Our valuation work combined with an assessment of the momentum and qualitative factors indicates that it is still appropriate to hold a neutral or benchmark allocation to Australian and International equities and an underweight to Property and Fixed Interest.



Risk factors to be aware of include:

  • Any deadlock that emerges between the US Congress and the President in the implementation of the tax cuts that have been factored into US equity prices or any stalling of the continuing budget resolution that may cause a Federal government shutdown at the end of September.
  • Any economic policy stumble by the Chinese leadership in the run to the 19th Party Congress later this year such as choking off credit and lending to loss making state enterprises too quickly.


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