The May sharemarket correction rapidly reversed in June because the US central bank surprised markets by signalling a possible interest rate cut as economic growth weakens.
While recent events have seen markets rally, our key indicators have failed to keep pace, which means all may not be what it seems and we are cautious of what could unfold in the near term.
The June rally has spilled over into July after a meeting at the G20 between US President Donald Trump and President of China, Xi Jinping, resulted in the two countries getting back to work on smoothing trade relations.
To that end, Trump lifted the Huawei ban we referred to last month, and China agreed to buy more US agricultural goods. For the moment, the trade war has entered a ceasefire period once again. But in our view it is unlikely to be permanent.
The strong sharemarket rally has seen the valuation of shares move back above our estimate of fair value, particularly Australian shares which look more stretched in price now than their global counterparts. By some measures, local stocks are at their most expensive in more than a decade.
The recent rally in shares is based upon an expectation of better growth ahead. However, our indicators of global activity have only recently started to stabilise, and have not kept up with the recent rally. In our view, it is still very early days and while we believe recession is unlikely, we remain cautious of the near-term growth outlook.