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The Australian economy is in a Goldilocks sweet spot heading into 2018, with rising commodity prices likely to push the local bourse higher after lagging global markets this year, analysts say.

But the fairytale will fade as the year marches on and markets start to price in the risk of recession in the US, which has enjoyed eight years of economic expansion.

Russell Investments global chief investment officer Jeff Hussey says equity markets are expected to rise in the first half of 2018 before facing headwinds as investors factor in the rising risk of a recession.

‘Equity markets can push higher over the first part of the year, before facing headwinds later in 2018 as markets factor in rising risks of a 2019 recession,’ he said.

‘Running with the bulls can be dangerous. It’s easy to get swept up in the elation of the crowd and underestimate the risks.’

Locally resource companies were the big winners this year on the back of an upswing in prices for commodities iron ore, coal and petroleum.

Resource stocks are tipped to be among the best performing local investments in 2018, while residential property and banks lose favour.

Russell Investments analysts said improving commodity prices mean the Australian market could catch up after lagging global markets in 2017.

‘The economy may start the year in a ‘Goldilocks’ zone, with solid growth and a low inflation pulse,’ they said.

‘However, we expect to see signs of re-emergent wage and price inflation over 2018, which will see the Reserve Bank of Australia hike rates twice.’

The analysts said banks may be in for a tough 2018 against the backdrop of a royal commission, which is expected to begin early in the new year.

CMC Markets chief markets strategist Michael McCarthy said local investors were traditionally biased towards residential property but would likely move away from that area in response to tougher lending restrictions.

‘We will probably see a trend away from that over the course of 2018 as higher costs imposed by regulation and risks for the market as interest rates rise start to weigh on investors’ minds,’ he said.