Where do we go from here?

One of the more popular pastimes at this time of the year is to look at the consensus views formulated by the different fund managers and research providers as where we are headed to in the world economy.

Australia’s premier research provider to the financial planning industry is Assirt. It has just released an opinion on the state of Australian and world markets.

A review of the past twelve months in the Australian sharemarket reveals the performance of the resource sector over the industrial as well as the small cap stocks over the fifty leaders (Table 1). However, it must be said that this was an unusual year and it is unlikely that the pattern would be repeated too often.

In the view of Assirt, the Australian economy will display the following characteristics:

• Growth will remain robust

• Higher interest rates will be in evidence as inflation edges up

• The Australian dollar will strengthen. The sudden dip in the value of the Australian dollar against the US dollar was prompted by the increasing differential between the Australian interest rates and those in the US. That position would have been redressed somewhat with the increase announced by the Reserve Bank of Australia. The longer-term outlook for the Australian dollar is realtively bullish with forecasts of exchange rates as high as 68 and 69 US cents by the end of 2000

• The returns from equities are still expected to be attractive, albeit below the long-term averages seen recently.

The world picture is a slightly different one:

• Global growth prospects remain good

• Inflation will become a concern. This currently appears to be more so in the US than anywhere else in the world

• Allied to the rise in inflation, interest rates are expected to rise as well. The Federal Reserve in America has shown itself to be as proactive as the RBA. There is little doubt they would act to stem the possibility of a rise in inflation if it were to surface.

The major risks Assirt sees to the scenarios that they have painted of our economy and of the rest of the world are:

• The ability of the US equity market to weather higher interest rates will be tested over the next twelve months as we see rate rises being implemented by the Federal Reserve. If the US equity market were to falter and a major correction occurred on Wall Street, it would flow through to Australia irrespective of the state of our economy

• Consumer debt levels are rising markedly. A number of analysts are concerned that, at a time of increasing debt levels, interest rates that apply to this debt are rising as well

• Faltering of the Japanese recovery. While we are starting to see stirrings of a recovery in Japan, it is far from certain that can be maintained. If Japan’s recovery turns out to be less than sustained it could keep the SE Asian region in something of a volatile position

• While Assirt is confident of the growth in some of the European economies, it warns that interest rate rises in some markets could cause growth to be stifled.

In summary, Assirt’s view is that, while global and Australian growth prospects are good, interest rates are expected to keep rising over the next twelve months with equity markets worldwide somewhat mixed.

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