Our key macroeconomic thoughts for the year ahead
Looking ahead to 2018 and investing, discover our three key macroeconomic thoughts and how they impact how we invest in our model portfolios.
- We think global economies will continue to strengthen with low interest rates, rising wages and improving job markets, although what this means for investment markets will vary from economy to economy. We believe that both European and Japanese equity markets still offer reasonable value, but the US is now overvalued, and the question remains as to how long this can be sustained.
- Australia looks set to face some challenges with record low wage growth, high energy costs, record debt levels (debt-to-income is now at 194 per cent) and low savings rates (savings rate is currently 4.6 per cent versus 10 per cent almost a decade ago in September 2008).
- We also expect to see a weakening AUD with falling commodity process and a decrease in the interest rate premium between US and Australia.
Our five key tips for our portfolio construction in 2018
- We will continue to invest in global market unhedged – this means that if the AUD depreciates versus global currencies, our investments will outperform.
- We will be overweight in European equities and underweight US equities in our global portfolios. At current prices, we think long-term returns on US equities will be as low as 3.5 per cent per annum, while we predict European equities to return 7-8 per cent over 10 years.
- The Australian equity market still looks like fair value over the long term because interest rates are at record lows and will remain low, while dividend yields are relatively high. This creates risk premiums for equities of around five per cent which makes the asset class remain attractive even in more difficult economic times.
- Our strategy remains to stay underweight in bonds, and overweight in cash as real interest rates (rates after taking into account inflation) remain at record lows, which make bonds an unattractive defensive asset class.
- We will continue to use passive index strategies for large markets.
At Twelve Wealth, our investing thesis remains that asset allocation delivers the majority of investment outperformance and diversification helps minimise volatility over the long term. Your friends might be gambling on the rise and rise of bitcoin, but our job is not to pick a winner each month, but grow wealth over the longer term.