Summary of key points


  • Continued earnings per share growth together with interest rates and bond yields that are still low by historical standards are underpinning share price growth across a number of major equity markets.
  • Australia is something of an exception where earnings growth is being offset by specific problems affecting some of the leading stocks such as the banks and Telstra.
  • Major budget deficits in most places provide ongoing support for the synchronised global economic growth.
  • Although interest rates and bond yields are rising in the USA, all of the major central banks are running monetary policy which is very supportive of the economy and equity prices.
  • This combination will probably support equity markets through 2018 and into 2019 but we need to monitor conditions in case they change.
  • Major threats may emanate from the multi-tasking White House which is currently turning its hand to brinkmanship in Korea, threatening Iran and the oil market, trade tensions with China while cutting its tax revenue base at home.
  • Over the medium term of the next three to five years, US ten-year bond yields are expected to rise by up to 1.0% p.a. or more to reach levels above 4% p.a. This has historically been an important trigger level for a major sell off in US equity markets.
  • Although a neutral weight to Australian and International equities is warranted, holdings in these asset classes should be well diversified, with a significant weighting to more defensive funds or stocks. This will include equity funds that may from time to time hold enlarged cash balances for defensive or opportunistic purposes.
  • In addition, a more significant overweight to alternative equities, which target an absolute return higher than cash or fixed interest and which are not highly correlated with equity markets, would be helpful in stabilising portfolio returns while still achieving a total return significantly above the cash rate.


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