• Shares remain overbought and are vulnerable to a short term pullback with potential triggers being uncertainty about what Donald Trump will do, the sharp back up in bond yields and the strong $US. However, any correction may not come until the New Year given normal seasonal strength (the Santa rally) into year end. And we see share markets trending higher over the next 12 months helped by okay valuations, continuing easy global monetary conditions, fiscal stimulus in the US, moderate economic growth and the shift from falling to rising profits for both the US and Australia.
  • Sovereign bonds are now very oversold and due for a short term pullback in yield. This is particularly the case in Australia where 10 year bond yields at 2.9% look out of whack with the likelihood that the RBA will cut rates again next year or at the very least won’t be raising them until 2018 at the earliest. But on a medium term view still low bond yields point to a poor return potential from bonds and the abatement of deflationary pressures as commodity prices head up, the gradual using up of spare capacity and a shift in policy focus from monetary to fiscal stimulus indicates that the long term decline in yields since the early 1980s is probably over. So expect the medium term trend in bond yields to be up.
  • Commercial property and infrastructure are likely to continue benefitting from the ongoing search for yield by investors, but this demand will wane as bond yields trend higher over the medium term.
  • Dwelling price gains are expected to slow, as the heat comes out of Sydney and Melbourne and as apartment supply ramps up which is expected to drive 15-20% price falls for units in oversupplied areas into 2018.
  • Cash and bank deposits offer poor returns.
  • A shift in the interest rate differential in favour of the US as the Fed remains on its path to hike rates should see the long term trend in the $A remain down.