While the US election is out of the way event risks could still cause short term volatility in share markets with policy uncertainty remaining high in the US (watch the senior appointments to Trump’s team), Eurozone break up risks coming back into focus with the Italian Senate referendum & Austrian presidential election re-run (both on December 4) and ECB and Fed meetings in December. Bond yields could also see more upside in the short term. However, despite continuing volatility we anticipate shares to be higher by year end and to trend higher over the next 6-12 months helped by okay valuations, continuing easy global monetary conditions, a shift towards fiscal stimulus in the US, moderate economic growth and the shift from falling to rising profits for both the US and Australian share markets.
Sovereign bonds are now very oversold and due for a bounce in price (or pullback in yield). But still low bond yields point to a poor medium term return potential from them. 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. Expect the trend in bond yields to be up.
Commercial property and infrastructure are likely to continue benefitting from the ongoing search for yield by investors though as these two asset classes never fully adjusted to the full decline in bond yields.
Dwelling price gains are expected to slow, as the heat comes out of Sydney and Melbourne thanks to poor affordability, tougher lending standards and as apartment supply ramps up which is expected to drive 15-20% price falls for units in oversupplied areas around 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.