A lift in company earnings will support sharemarkets over the next 12 months, but inflation and growth will remain subdued and keep a lid on returns, State Street Global Advisors says.
Wednesday's better-than-expected inflation read from the Australian Bureau of Statistics, which showed an annual rise of 1.3 per cent, may add to a lift from the disinflationary mood that has been plaguing markets, but SSGA's Asia Pacific head of strategy and research Thomas Poullaouec said the rise lacked fundamental drivers.
Higher oil prices and a bottoming out of global GDP growth had served to push headline inflation numbers higher, but growth was expected to remain below average for the sixth straight year.
"For inflation to trend higher and higher, we will need to have not only the technical effects but for growth to surprise on the upside," Hong Kong-based Mr Poullaouec told Fairfax Media.
"Inflation will remain contained, of course for Australia this is already at a level that is in the range of what the RBA is comfortable with, so there is no need to move from an easing to a tightening bias yet," he said.
Bets that the Reserve Bank of Australia will cut rates by year's end dropped from 20 per cent to 8 per cent following the ABS numbers.
China upgrade
Commodity price rises had helped lift the local consumer price index, fuelled by China's stimulus program earlier this year which has resulted in a stabilisation of its economy.
"We recently upgraded our view on China, on the fact that China was one of the key risks to the economy and financial market stability at the beginning of the year, and some investors played into that mood," Mr Poullaouec said.
However, the desire for policymakers to hit the country's 6.5 per cent GDP growth target has come at the expense of its shift away from a manufacturing to consumption-led economy.
"It's a bit unfortunate that this is for a bad reason and not the social reform they intended to do," he said.
SSGA also sees limited scope for further price upside on commodity prices which remain unbalanced on the supply side.
"In the second half of next year we may see a bit of a plunge if we don't see supply moving," Mr Poullaouec said.
Still, SSGA favours equities over bonds, the prices of which have begun to fall in certain markets including Australia, Japan and the US.
Brighter outlook
Earnings in the US, while negative over the past four quarters, have been better than feared and are expected to turn positive. This is adding to a brighter outlook for equity markets, albeit with returns remaining subdued along with growth.
"With a one-year view we would see equities to outperform bonds but with very modest returns, in the high to single digits, and bonds at 2 to 3 per cent," he said.
"In the next month [however] we have a cautious stance on equities, specifically in Japan and Europe, and are neutral on US and emerging markets."
Next month's presidential election is unlikely to disrupt the markets beyond a short-term knee-jerk reaction, Mr Poullaouec said. While Donald Trump's chances of winning the US election were falling, even if he did succeed, while it would spark some immediate volatility, "we don't think it will have a material impact in the short term".
Echoing Citi chief global equity strategist Robert Buckland's comments last week that next year's French presidential election was a greater concern to markets than the headline-grabbing prospect of Donald Trump entering the White House, Mr Poullaouec agreed Europe was a bigger risk.
Italy's referendum on constitutional reforms in December could result in incumbent Prime Minister Matteo Renzi to be thrown out which may lead to a push for an Italian exit from the European Union, the "first domino" amid a wave of anti-EU sentiment sweeping the continent ahead of elections in France and Germany in 2017.
"This is a time when Europe needs more unity to face Brexit ... the way we view Europe might change if we see some disappointing results in the elections ahead," he said.
