Money

The outlook for the Australian economy and investors in 2017

Despite historic low interest rates, super funds and investors generally have fared well in 2016. Returns from Australian shares and property have been good, the US share market is at record highs and commodity prices have staged a partial recovery, helping the Australian economy.

Among other things, the solid investment returns this year provide an excellent opportunity to review asset performance and reassess risk profiles to ensure they still meet current needs. It's always more profitable to readjust portfolios and take profits when markets are strong rather than being forced to make changes in downturns, for example because of the need to build up cash reserves.

The coming year could prove to be more difficult for investors for several reasons. Importantly, the strong US economy will almost certainly result in higher official US interest rates. This will present difficulties for those countries, including Australia, that are dependent on inflows of foreign capital.

Particularly hard hit will be the companies and countries who have borrowed in US dollars to take advantage of lower interest rates. These borrowers will have to deal with both higher interest charges and a higher US dollar. The overall consensus is that the Trump presidency will boost the US economy through tax reductions and infrastructure outlays but there are concerns about the impact of possible changes in US trade policies on trade partners.

For Australians, the biggest concern is an adverse impact on our major trading partner, China. Continued strength in Asian economies is particularly important for both commodity prices and the world economy because of the likely problems in the European Union. Coming after the UK Brexit decision, the latest political developments in Italy and impending elections in France have increased the possibility of a breakdown in the European Union.

The UK has at least been able to cushion the adverse impact of Brexit on the economy by a steep fall in the value of the pound. Struggling economies including Greece and Italy where the banking systems are under severe pressure have no such luxury with the value of the fixed Euro.

The much stronger German economy has and will continue to benefit from the common currency, which is undervalued compared with the Deutschmark were it a separate currency. The Euro as a common currency has removed the possibility of quick solutions to the economic problems of the struggling EU members.

While Australian interest rates are unlikely to increase sharply in 2017, borrowing rates have bottomed with the major banks starting to increase fixed interest rates anticipating higher future rates. All things considered, 2017 could be a period of considerable uncertainty for both the property and the share markets. Caution will be needed.

Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au

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