Relatively benign market conditions face investors this year, with continued strength for commodity prices, corporate earnings and economic activity – particularly in developing countries – underpinning a suggested tilt towards growth stocks.
According to Eric Siegloff, the director of investment strategy and asset allocation for ING Investment Management, conditions are conducive to equity markets although market earnings growth is likely to peak and earnings momentum to fall. Siegloff addressed a Centre for Investors Education ‘chairmen’s forum’ yesterday on the outlook. He said the key factors for the year ahead were: • economic activity – an improved platform, synchronous growth, with the main focus on sustainability of growth; • oil prices – ongoing vulnerability; • monetary policy – continued removal of monetary accommodation with the main focus on the US, Europe and Japan; • commodity prices – broad-based strength due to strong demand and tight supply, but, structurally, we are within a multi-year price cycle; • robust corporate earnings, but the cycle is peaking so investors should focus on sustainability. An important ‘sub-theme’ was a leaning towards emerging markets. “The US market does not appear to offer the same degree of upside potential from structural change as is plausible in Japan or Europe, let alone the emerging markets of Asia, Europe and Latin America …,” Siegloff said. The emerging markets had robust economies, were relatively cheap and their returns might reach 15-20 per cent over the year. “Leverage to emerging markets has been a theme of recent years and is one which is expected to continue through the medium and longer term,” he said. “There is every reason to believe that the share market weights will tend towards real GDP weights of these emerging economies in the long run.” Real GDP of the so-called ‘BRICs’ – Brazil, Russia, India and China – is estimated at 44 per cent of the world economy, according to the IMF, but market capitalisation is only 7 per cent. The BRICs theory has been popularised by Goldman Sachs, which published a paper in 2003 entitled “Dreaming with BRICs: the Path to 2050’. There are 26 investable markets in the global emerging markets index, of which Asia represents about 50 per cent, Europe 30 per cent and Latin America 20 per cent. “China plays a key part in this equation as a key current and key future driver of world economic growth, industrial production and trade,” Siegloff said. However, as always, there were risks, which might disrupt the rosy scenario. These included: • further upward momentum in the oil price, posing a threat to corporate earnings momentum and inflation and interest rates; • the possibility of a trade dispute between the US and China, looming as a check on world trade and growth; • implications of Iran’s resumed nuclear energy program on world security, impacting consumer, business and investor confidence; • the transmission of avian flu to humans as a pandemic, representing a key risk to confidence and activity in all areas. Siegloff considered these risks to be “low to moderate at this time”.
The Coalition is reportedly considering a proposal to reduce the superannuation guarantee to 9 per cent if it wins the election. Many in the industry would understandably view any such move as a partisan effort to weaken the system, but they must also be open-minded about the evidence and accept that improving quality of service is the best response to critics.
Colin Tate AMJanuary 15, 2025
