Equity Market Flow

Profits during the past 12 months have risen by 31% buoyed by manufacturing and a doubling of resource company profits. Resource earnings have been boosted by better commodity prices and a weak A$.

Profits are running at their best pace in 12 years, driven by strong economic growth, relatively low interest rates by historical standards, rising jobs and a muted wages growth that caps the inflation outlook.

The outlook for the world economy has improved significantly over the past month as the threat of a US hard landing recedes. The key change has been the tech-related prospect of very high US productivity growth which means output can expand at 4%+ without rekindling inflation concerns. The US Federal Reserve is now less likely to raise interest rates as long as high US productivity growth is maintained. Growth in Europe and Japan is trending up as well, thus underpinning Australian export earnings growth. That is proving to be a major support for Australian economic growth, spending and the Australian share market.

Recent taxation changes, including the halving of capital gains tax for shares held for longer than 12 months, are triggering a sea-change in company capital management. Companies will move increasingly to reward shareholders through a combination of dividends and capital returns/share buy backs. The last time such a fundamental change took place in the share market was in 1986, when dividend imputation was introduced. Capital management has also improved significantly as companies seek improved returns on capital.

Increased fund flows from superannuation funds and private investors, coupled with reduced equity supply from IPOs and share buy backs are likely to place upward pressure on company share prices.

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