Financial Advisors & Planners Perth I Westmount Financial I Rick Maggi

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01/02/16: DON'T LET A TOUGH START TO THE YEAR SET THE TONE

Last year global sharemarkets were hit by a range of worries including a slowdown in Chinese growth, rising US interest rates and slumping commodities prices.

However, despite the global market sell-off over the last few weeks, we expect conditions to somewhat improve during 2016, with global growth continuing and interest rates (monetary policy) remaining highly accommodative.

Interest rates... Interest rates are expected to remain low in 2016, and in Australia they might even go lower. The reality is that growth, while improving in some quarters, is still relatively constrained.

While the US Federal Reserve may raise rates a little further, they are likely to be extremely cautious as they wouldn't want to inadvertently derail the progress being made in the US economy.

Elsewhere around the world we're likely to see further easing, particularly in Japan, Europe and China. On the home front, Australia will continue to perform below potential and that is likely to encourage the Reserve Bank to cut interest rates again.

In short, there will be a lot of incentive for investors to look beyond cash and bank deposits where returns are going to remain very low for some time. For example, global share returns are expected gain in the vicinity of 7%-9%, according to AMP Capital.

Australian property market. The Australian property market is basically slowing down. However, the various capital cities and regions have been performing quite differently from each other, with price declines in Perth and Darwin, modest growth in Adelaide, Hobart, Canberra and Brisbane, and significant strength (at least in recent years) in both Sydney and Melbourne.

The slowdown has been in Sydney and Melbourne with negative house prices and lower auction clearance rates taking hold over the last three months, primarily due to the government's push to slowdown bank lending through tougher lending requirements and higher interest rates. These factors have combined to dampen investor sentiment and the downturn is expected to accelerate into 2017. That said, we don't see a property crash coming either.

Implications for investors? The combination of okay global growth, still low inflation and easy money remains positive for growth assets. But ongoing emerging market uncertainties combined with Fed rate hikes and geopolitical flare ups are likely to cause volatility.

> Global shares are likely to trend higher helped by a combination of relatively attractive valuations compared to bonds, continuing easy global monetary conditions and continuing moderate economic growth.

> For shares we favour Europe (which is still unambiguously cheap and seeing continued monetary easing), Japan (which will see continued monetary easing) and China (which will also see more monetary easing) over the US (which may be constrained by the Fed and relatively high profit margins) and emerging markets generally (which remain cheap but suffer from structural problems).

> Australian shares are likely to improve as the drag from slumping resources profits abates, interest rates remain low and growth rebalances away from resources, but will probably continue to lag global shares again as the commodity price headwind remains.

> Commodity prices may see a bounce from very oversold conditions, but excess supply for many commodities is expected to see them remain in a long-term downtrend, so patience is required.

> Very low bond yields point to a soft return potential from sovereign bonds, but it’s hard to get too bearish in a world of too much saving, spare capacity & low inflation.

> Commercial property and infrastructure are likely to continue benefitting from the ongoing search by investors for yield.

> National capital city residential property price gains are expected to slow to around 3-4%, moving into negative territory during 2017 as the heat comes out of the Sydney and Melbourne markets.

> Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.5%.

> The downtrend in the $A is likely to continue as the interest rate differential in favour of Australia narrows, commodity prices remain weak and the $A undertakes its usual undershoot of fair value. Expect a fall to around $US0.60.

This update is published by Westmount Financial/Westmount Securities Pty Ltd (ABN 42 090 595 289/AFSL 225715). It is intended to provide general information only and does not take into account any particular person’s objectives, financial situation or needs. Because of this, you should, before acting on any information in this document, speak to us and/or a taxation/finance professional.