Globally, sharemarkets over the year to September returned 20 per cent. The Australian market was somewhat weaker, returning around 9 per cent. Nevertheless that's still quite a solid return.
The question, of course, is how much longer it can go on? In an uncertain world it’s best to focus on the fundamentals. What is happening in the economic cycle? Then we look at the valuations. How much are we actually paying for the shares we buy? These two things are critical.
When we look at what's happened in the last 12 months what we find is a strong sharemarket made sense. We had a stronger global economy, inflation was somewhat higher and profitability grew.
All of these things were positive in driving profitability and therefore markets. If we actually go back and have a look at the extent of this length of the cycle, it's been going for a long period of time.
Unemployment is low amongst the global economies such as the United States, Germany, the United Kingdom and Japan.
So how much longer can it go on? The key thing which usually brings to an end a rally or an economic expansion is higher interest rates. This is what happened in 1987 when US bonds rose 3 per cent over the year to the crash.
Why are interest rates historically low? Negative in Japan, negative in Europe and modest, around 1 per cent or so, in Australia or in the US.
It comes down to inflation. At the moment inflation is still low. Central banks are keeping rates low to drive growth. While the United States is raising rates they're doing it very gradually.
There is no doubt as we move into 2018 the risks will actually begin to build. Inflation is picking up in the US. Will we get higher inflationary pressures? ANZ’s view is they will gradually come through.
While we're aware of the risks, we think there's still a while ago left to go in this sharemarket rally.