Summary of key points


  • Little seems to have changed over the course of the last month. Trump and Kim are still ranting at each other, although it seems to have a harder edge more recently. The Fed is still planning four rate rises by the end of 2018 and the markets still don’t believe it. Merkel is still the Chancellor of Germany, albeit with a more complex parliamentary situation to deal with. The US equity market is still at or near a record high in spite of all the worries that it seems to be ignoring.
  • Bond yields worldwide are still at historically low levels, providing the main support for equity asset prices, along with earnings growth that is holding up and even accelerating in places.
  • Our valuation work, combined with our assessment of the qualitative factors, shows that it is still appropriate to hold a neutral or benchmark allocation to Australian and International equities, using a longer-term perspective.
  • There are risks of a shorter-term sell off in the months ahead. If this happens, the next likely move is to go overweight equities on weakness, although the prospects of prolonged weakness would also need to be carefully appraised
  • It is not hard to find potential triggers for a short run sell off in equities. The main recent events of significance have been:

◦ The US Federal Reserve announced that it expects to increase short interest rates four times in the next fifteen months and that it will also be reducing its holdings of long term bonds and mortgage securities by at least $10 billion per month. The pace of this Quantitative Tightening will eventually pick up to $50 billion per month and this will put upward pressure on US ten-year bond yields. In turn this will put downward pressure on equity prices in the US and elsewhere.

◦ The Deputy Chairman of the Fed, Stanley Fischer, a steadying influence on policy, announced his retirement within the next few months. This will leave four of the seven Board seats at the Fed empty, to be filled by the Trump administration but subject to Congressional approval. Given the state of Trump-Congressional relations, this may lead to a period of uncertainty in Fed policy just as it is implementing the great unwinding of the highly stimulatory monetary policy adopted since the GFC ten years ago.

◦ Trump did a deal with the Democrats to stave off the debt ceiling crisis from September to December, much to the chagrin of congressional Republicans. While this takes pressure off financial markets, it is only temporary. The dynamics of the US Congress are still unstable, as shown most recently by the inability of the Republicans, who have a majority in both houses, to pass the repeal of the Affordable Healthcare Act (Obamacare). Looking beyond the debt ceiling issue, the fate of tax reform and tax cuts that have been largely factored into equity market prices is by no means clear.


Sign up to receive our latest news

  • This field is for validation purposes and should be left unchanged.