Company Interview / Shane's View: expect a volatile ride

The Australian share market had another go at a record high in the past week supported by strong profit reports. It likely has more upside but expect a volatile ride. The key constraints on Australian shares are: rich valuations with the forward PE around 20 times which is well above its long-term average of 15 times; the absence of much risk premium over bonds; the RBA’s hawkish bias; and global uncertainty around tech shares, US policies and geopolitics. 

But it’s getting a big push along from company earnings rising again after three years of falls led by the miners and banks with December half earnings results confirming this and a global investor rotation away from the tech heavy US. So, we see more gains this year, but expect a volatile ride. 

On the RBA, our base case remains for rates to remain on hold for the remainder of the year, but the risks are on the upside. The minutes from the last RBA meeting leant a bit hawkish reflecting concerns about capacity constraints and the risk that inflation could persist above target for too long. 

December quarter wages growth was in line with its forecasts but January jobs data was on the strong side. With the RBA focused on quarterly inflation data it will likely wait till after March quarter inflation data is released ahead of their May meeting before making another hike. That said, if inflation data due in the week ahead surprises on the upside, then taken together with the strong jobs data another hike next month would become a high risk. 

However, we expect inflation data to confirm a further downtrend in trimmed mean inflation enabling the RBA to leave rates on hold this year, but it’s a close call and the risk is well and truly on the upside.