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Current Financial Market Signals - January 2018

Below is the latest colourful dashboard updated from 18 January 2018 by one of our research partners, Ineichen Research & Management (IR&M).

Chart of the month – strongest global profit increases for 7 years.

Ultimately it’s company profits that drive share markets and so one of the key statistics we look at is analysts’ estimates of future profits. All else being equal, improving estimates push share prices higher and vice versa. This month, analysts worldwide have increased their earnings per share (profit) predictions for the next 12 months by a whopping 3.8%. This is the biggest increase since the early days after the Global Financial Crisis.

The chart below shows the close relationship between changes in global profit estimates and the global share market.

Source: IR&M

So what are the main drivers? Global economic growth has been rising steadily, climbing to around the 3% level with strong upward indicators in the last quarter. The US tax reform legislation passed in late December provides a clear boost to “after-tax” US profits in 2018 with the corporate tax rate lowered from 35% to 21%. Earnings per share for US financial stocks have been upgraded by 10% over the last month alone and the bulls are predicting significant capital flows and investment into the US as multinationals respond to tax incentives to do business in the US.

Meanwhile, estimates for profit growth in Australia are improving slightly, lead by the resources sector. Earnings estimates improved around 1% over the last month and are around 5% stronger than a year ago. It’s pleasing that the major sectors in Australia are positive, but with a cooling housing sector and soft wages growth it’s evident that the Australian cycle is a little out of step with the rest of the globe. More on Australia below.

January Observations

In the IR&M dashboard, green is good, red is bad. Markets respond mostly to change. Changes vs last update are circled.

The key take outs from Table 1 are:

  • Overall changes were balanced. From 63 regime tests in this update, 61 (97%) were positive. Compared to 90% in the December update.

  • Globally, the pick-up in economic growth continues.

  • Economic momentum remains mostly positive. OECD leading indicators continue to rise. Consumer sentiment remains rising, business sentiment remains falling.

  • Earnings estimates are rising strongly with strong rises in Energy and Financials.

  • Australia remains at an inflection point. Macro surprises have been negative since October 2017 and earnings estimates have not changed.

Important: Ineichen does warn about complacency in financial markets and the very low level of volatility across markets does seem at odds with the volatile political climate.

Table 1

A refresh on the columns

Looking at each of the factors, broadly from left to right, the first five columns set out IR&M’s interpretation of various recent economic data released in those counties and whether it is generally improving or deteriorating. The EPS change column in the middle is a very important indicator of whether profits estimates for the next year are rising or falling. The final three columns look at the momentum (or technicals) in the various global share markets.

Are there any Risks?

Broadly there are fewer risks, the sum of positive indicators has stabilised. Key changes over the month include- economic momentum indicators in both Japan and China having improved. Japan has experienced momentum in financials and long term 10 yr yields improve, as has GDP- year on year growing >2%.

Long term momentum of US 10 yr yields and 5 yr credit spreads continue to fall against a rising FX momentum.

December 2017 bottom line tally:

What about Australia?

According to Ineichen’s data, economic momentum is going sideways. The Australian financial market long term momentum remains positive with earnings estimates remain unchanged.

Australian PMIs have bounced off their lows and remain in an upward, positive trajectory and finally, the Australian REIT sector has stabilised.

Table 2

Source: Ineichen Research & Management

IR&M is one of several research sources that guide our investment decision making. They are Swiss based and provide a detailed global view of the many drivers of investment markets. Like us, they believe that in the long run investment returns are driven by the fundamentals (the prices today will ultimately revert to what various things fundamentally ought to be worth) but in the short term may be driven more by sentiment and momentum (otherwise known as “technical” signals).

Disclosure Statement: This communication has been approved and issued by Sovereign Wealth Partners Pty Ltd ABN 18 607 071 367 Corporate Authorised Representative (No. 001233909) of Bennelong Wealth Partners Pty Ltd ABN 44 164 127 833, AFSL 456235.

General Advice Warning: Any advice included in this article and associated links is general in nature and does not take into account your objectives, financial situation or needs. If a product we recommend has a Product Disclosure Statement (PDS), you should read it before making a decision. Past performance is not a reliable indicator of future performance. We do not endorse any information from research providers that we provide to you, unless we specifically say so.

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