Market Watch: Future gazing to year-end

Last week was a perfect showing of the macro thematics of recent years finally being priced into global markets.

It was also a perfect reminder of why being diversified across asset classes and geographies, with a growth tilt, is likely the best way to outperform a defensive setup for the remainder of 2018 and into 2019.  

Key themes for the final quarter of the year based off the current data and forward indictors:

• US economic strength – services, employment, wage growth and consumption are all ratchetting up. US GDP is expanding at 4.2 per cent and getting stronger still, while US earnings continue to grow at around 20 per cent year-on-year (EPS growth). I expect US markets to continue to outperform global peers.
   
• US bond bears are finally out of hibernation – this will push US bond yields up, meaning, fixed interest and corporate bond markets are in for a tough time and likely to underperform on a capital basis.
   
• Oil markets are heading into a peak demand period, with the Northern Hemisphere moving into winter, and sanctions on Iran coming into play in early November. This will put pressure on supply. If you thought oil was expensive now… wait until Christmas. All that touched on above, coupled with a lower Australian dollar, means oil could rise to A$130-$135 per barrel. On the flipside, Australian liquefied natural gas (LNG) exports hit an all-time high in August, based on the trade balance data, and are heading higher still. LNG is currently at its highest level since mid-2013 – investors can expect energy plays to keep on keeping on.
   
• The sell-off was justified, but now emerging markets (EM) may be ‘catching up’ rather than dragging down developed markets (DM). It’s clear it has created some rather large value gaps as the selloff was broad-based and indiscriminate.

Thinking locally, those with FX tailwinds are likely to outstrip their domestic-facing peers in the final quarter of the year. The following chart from Morgan Stanley shows just how well firms with international earnings have performed since the end of the GFC. With the Australian dollar now down 10 per cent in 2018, this tailwind will continue to allow underperformance.