Australian equities are "marginally in the black year to date" and the economy is growing at a faster than expected rate, according to the latest Morningstar note.

"The S&P/ASX 200 index has made a 0.5 per cent capital gain and delivered a total return, including dividends, of 2.4 per cent. There have been marked divergences in sectoral performance."

The gains occurred across the board, in IT stocks, resources and consumer defensives, which rose 1.4 per cent, 9.7 per cent and 8.5 per cent, respectively.

"The overall modest outcome, however, reflects the heavy drag of the financials, which were down 8.9 per cent," Morningstar says.

"These have continued to weaken due to ongoing bad publicity at the Royal Commission and, more recently, from the news of criminal cartel charges laid by the Australian Competition & Consumer Commission."

Economic growth gathers pace

According to the update, recent data indicates a "modest turn for the better," with the local economy growing at a faster-than-expected 3.1 per cent annual rate in the first quarter of 2018. Corporate profits were also up 5.3 per cent for the period on a year-on-year basis.

The unemployment rate of 5.4 per cent was down further on the previous quarter, to its lowest rate since 2012.

"The probability is that the economy is heading into a better period of business performance with the RBA, for example, saying at its latest policy decision that it expects 'GDP growth to pick up, to average a bit above 3 per cent in 2018 and 2019.'

"It is not a certainty, particularly given the still-cautious behaviour of households … but overall there is enough in the recent data to suggest that, outside the financial sector and parts of retailing, other sectors of the equity market may finally to start to benefit from the long-awaited pickup in business activity," the update notes.

US outshines global equity rivals

Reflecting on the quarter to the end of March, the report notes the high volatility this year as the MSCI World index of developed markets posts an increase of only 1.5 per cent in US dollar terms.

Among the major markets, the US has performed best: the S&P500 has risen 4 per cent.

"Other major markets have shown little net movement, with Japan's Nikkei up 0.4 per cent, and the FTSEurofirst 300 Index of European shares down 0.6 per cent. In the UK, shares are also down 0.7 per cent."

In emerging markets, "sharp setbacks in Argentina and Turkey have sensitised investors to the risks of the emerging markets more generally".

Risks rising and mutating

"The economic fundamentals are still supportive of equity price gains, especially in the US," Morningstar notes. "But there is no denying that the global expansion is now getting on in years, and the odds of an interruption to the expansion at some point in the next year or two are shortening.

"The risks are rising and mutating," the update notes, referring to the escalating US-China trade skirmish as Donald Trump adds US$200 billion of tariffs to Chinese goods, on top of the existing US$50 billion.

"Confrontational protectionist policies raise a real risk of disruption to the global economy, and the BAML managers now rate trade wars as the single most worrying risk, ahead of a monetary policy mistake by either the Fed or the ECB, and the risk of a eurozone financial crisis."

 

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