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Sectors to watch in 2018

Sectors to watch in 2018

Any softening in the Australian economy is likely to be offset by “healthy growth” in the global economy and the mining sector is expected to make a “positive contribution”, according to investment management company T. Rowe Price.

The Head of Australian Equities at T. Rowe Price, Randal Jenneke, forecasts globally exposed cyclical stocks to perform well in contrast to “expensive defensives” - sectors including consumer staples, telecoms, infrastructure and real estate investment trusts - which “might struggle in 2018”.

“The good news for the Australian economy is that the mining sector is expected to make a positive contribution to growth,” Jenneke says in an outlook for Australian equities.

“Stronger commodity prices and a recovery in capital expenditure are driving this sector improvement.

“Rising demand for higher-quality, ‘cleaner’ commodities, of which Australia is a leading producer, is also a key influence,” he says.

Valuation levels of Australian companies “do not appear particularly stretched” at the moment, which he describes as “encouraging”.

Inflation and housing

The main risk to any positive outlook, however, would be if global inflation started to build rapidly, “causing interest rates to rise at a faster-than-anticipated pace”.

Jenneke says the maturity of the current housing market cycle “could also leave the Australian economy vulnerable to a slowdown during 2018”.

“It appears that we have reached a peak level in housing construction in Australia and we see this slowing trend gathering pace into 2018. Housing prices also appear to be falling from their highs, and the knock-on effect of this will be a negative for consumption in our view.”

Jenneke says the impact might not be dramatic, “but the fact remains that the housing market has been a key source of growth and, indeed, confidence for Australians in recent years”.

Geopolitical risks

More broadly, the Head of Multi-Asset Solutions APAC at T. Rowe Price, Thomas Poullaouec, says equity returns in 2018 are likely to be driven by earnings growth.

“Further earnings upside for equities could come in the form of potential major US tax cuts, or growth in Europe and Japan,” Poullaouec says.

“However, potential risks to equities could include a rise in geopolitical or trade tensions, or central bank policy missteps as interest rates and inflation both appear poised to rise from current low levels.”

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. The commentary provided from external companies, including T. Rowe Price, that are not a member of the Commonwealth Bank of Australia Group of Companies (the CBA Group) does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. Neither Commonwealth Securities Limited nor members of the CBA Group accept any liability for losses or damage arising from any reliance on external companies and their products, services and material.