Global markets have generated strong returns on the back of improving economic fundamentals and consistent signs of inflation, which have generally fed back into Australian shares. Overall, the balance of risk appears to be improving, but while investors have every reason to be upbeat, they should not expect clear skies for the rest of the year.
“The rotation into equities has been a consistent theme since October last year, with yields moving off historic lows and shares pushing ever higher,” said SuperRatings Chairman Jeff Bresnahan. “But we saw the market embracing duration again in late March, indicating that investors are questioning whether the reflation trade is sustainable. In short, the market is not convinced that shares will keep rising in perpetuity.”
Global yields were flat in March, and the US currency came under pressure despite the Fed’s recent rate hike. The failure of the White House to pass its healthcare bill in the US House of Representatives put a dent in the reflation story, with the full implementation of tax cuts and promised infrastructure spending now appearing further from political reality.