Three reasons why DNR Capital is optimistic on 2017/2018 financial outlook – despite mixed signals, overall economic outlook reasonably robust
Jamie Nicol
Global equity markets have reached an all-time high, but global growth is sustainable and company valuations are fair, according Australian equities manager DNR Capital.
Jamie Nicol, CIO at DNR Capital says: “We are optimistic about global growth prospects after reviewing key asset classes and market trends, such as the potential for expansion of the US manufacturing sector and Australia’s rising commodity prices.
He adds:“In assessing the outlook for the Australian market, we are thinking about three key reasons that impact the global growth outlook – the potential for inflation to raise its head, the pressures on the consumer in Australia and the political environment.
“Recent data continues to support the global growth outlook. US manufacturing data has been particularly strong with the Purchasing Managers Index (PMI) accelerating to 57.8 in June, which is at a three-year high and signals strong expansion.
“Likewise, we have seen continued economic improvement in Europe with the PMI at 57.4, the strongest since April 2011.”
Domestic equity markets continued to be a stand out in 2017 and the valuations are fair, according to Nicol, reflecting the “improving business conditions since December 2016, with the exception of retail and manufacturing.”
DNR Capital also identified Health Care as the strongest performing sector for the 2017 financial year, and Energy as the worst performer.
Nicol highlights some key performers in the Australian market “particularly testing services provider ALS Limited (ASX: ALQ), who experienced growth of 55 per cent for the financial year off the back of a pick-up in commodity prices and the announcement of the company’s intention to sell its loss-making oil business and make further acquisitions in the life sciences.”
Nicol says: “The domestic market provided a small return for the month of June with the S&P/ASX 200 Accumulation Index up 0.17%, but overall the 2017 financial year closed up strongly at 14.09%.”
“Banks continued to be under scrutiny, with South Australia announcing it would introduce its own state-based bank levy on the five major banks (including Macquarie), just six weeks after the Federal government announced a bank levy that aims to raise $6.2 billion. However APRA has provided certainty in terms of the level of capital required by the banks which reduces the risk on this investment.”
Outlook for the domestic economy is mixed, according to Nicol. Consumer confidence is soft and household debt is high, but key industries, such as mining and travel, have improved the domestic outlook.
Nicol says: “We expect housing prices to at least moderate, which creates some risks for the domestic economy.
“At odds to this is that business confidence is strong. We are seeing a pick-up in mining activity, travel remains strong, export sectors like agriculture and tourism are performing well, and infrastructure projects are accelerating.
“There are mixed signals for the domestic economy, and an opportunity for judicious portfolio positioning to add value.”
Political risk continues to overshadow the market and low interest rates have also been a critical market driver.
“A major shift in interest rates could cause some destabilisation and a rotation in leading companies in the market, but the overall economic outlook appears reasonably robust,” says Nicol.
