The path forward feels a little easier for Aussie stocks versus that confronting the US stockmarket. Ultimately the direction of the latter will hold sway but Eley Griffiths Group feel the Australian market will outperform the US market in the short term.
Several major US stock indices have failed to reclaim their January highs. At times price action has appeared insipid for the S&P 500. Breadth for the index has narrowed notably, in fact Goldman Sachs (GS) confirmed the top 10 S&P 500 stocks have contributed > 100% of the benchmarks 2018 ytd return.
Top down, a loss of momentum in the US economy (GS GDPg 2.9% (18e), 2.2% (19e) and 1.5% (20e) ) will progressively weigh on investors. Throw in higher wages growth, firming interest rates, an uncertain external sector and you are fostering conditions for margin pressure and lower share price returns. This is not an immediate issue however, neither is the flattening yield curve that seems to hijack a growing number of market commentaries.
Seasonally, the September quarter is not kind to equities. We sense investors will be looking to US corporate chiefs to be ‘jawboning’ bullish outlook statements at the pending Q2 reporting season to sustain share price momentum.
Australia on the other hand feels decidedly upbeat having been recently liberated, technically speaking. Our reporting season opens in around 2 weeks and warnings to date have been more contained than usual. Expectations are for a reasonable season. Valuations are not excessive and an equity risk premium of 6.9% is supportive of a generous portfolio allocation to equities over bonds.
Despite a spongy listing day, the successful $2.7bn IPO of Viva Energy speaks to heightened investor confidence in the local market. In fact it was the market’s the biggest equity call in 4 years. We expect the bullish tone for stocks to continue, with small and emerging companies to perform well through the balance of 2018.