There are several themes facing Australian investors in 2019, so below we have summarised 5 of the most important and topical for the year ahead. These themes will feature prominently in the media and will often be topics of conversation, not only with our clients but for many of you at the dinner table or the weekend BBQ. To that end, we will be writing in more detail on these topics each month over the course of the year. We look forward to sharing our unique insights and the way we think about these issues and the risks and opportunities they present.
The USA and Trump
While the current state of USA economy is solid and the long-term outlook improving there are many areas of concern in the short term. On the plus side Trump’s aggressive ‘America first’ policies are broadly good for the USA economy and corporate America. The tariffs implemented are going to provide short term support to US industry, and create jobs, but this is likely at a cost in the long term. Despite the positive news, consumer sentiment in the US is now at a two-year low. On the negative side Trump is obviously volatile and unpredictable and that is not something that financial markets generally like. 2019 appears to be potentially more volatile politically than the previous two years, as tensions mount with issues ranging from the recent government shut down and border security to the Mueller ‘Russia investigation’ and the trade dispute with China and other nations.
China vs USA tensions are here for the long term
The USA and China trade tensions are here to stay. To a point, given China’s amazing growth in the past decade or more, it was inevitable that problems would arise as China rose to prominence and challenge the status quo. The reason this issue isn’t going away anytime soon is simple. The elephant in the room is that China’s rise now makes them a threat to the long-term dominance of the USA as the most powerful nation in the world. From a purely strategic national interest perspective – and I am really oversimplifying here – the US are aware that to retain the status quo and remain the sole global super power they have a lot of work to do. We believe the macro forces at play are important for investors to understand as we move toward an increasingly volatile geopolitical environment in the years ahead. In the short to medium term, these forces will manifest in a variety of ways such as escalating tensions over trade, the allegations against Huawei executives and the South China Sea dispute; but ultimately, we expect these tensions are here to stay and will increase in the long term.
Australian Federal Election
The battle between Bill Shorten and Scott Morrison, by mid-May this year, is unlikely to overwhelm us with charismatic and inspiring speeches. Instead, it’s likely to be the political equivalent of a street fight. While there is a lot that can change between now and the election, the Liberal Party leadership changes annoyed a lot of voters and is likely to be a real issue. Given Australians historically tend to vote political parties out, for poor performance or management, rather than vote a party in, I suspect Shorten and the Labor Party wins the race. The prospect of a change of government has already raised some concerns for our clients in relation to key policies flagged for change such as CGT, negative gearing, superannuation and franking credit refunds. Our view is that at this stage much of the policy proposed and discussed in the media amounts to ‘testing the market’ in an effort from both sides to gauge the level of voter appeal or backlash for each potential policy as strategists prepare the platform that they will run with in the months ahead. We will monitor closely but are not currently concerned.
Residential property will continue to fall
With residential property prices having fallen around 10% last year, and many forecasting further falls in prices this year in the range of 5%-10%, this sector is facing a difficult year or two. Firstly, it is difficult to see a trigger for what will support prices let alone drive prices up. It’s just difficult to see where demand will come from in the short to medium term. Australia remains in a situation where wages are not increasing, rents and property values have dropped, we have historically low interest rates and yet households remain under significant mortgage pressure. Where previously the low interest rates provided a level of support, in 2019 we enter a situation where people now expect property prices and rent to go lower. This sentiment if it prevails for too long can hurt demand as it causes people to hold of purchasing until ‘later’ because prices will be cheaper, and a vicious cycle begins. This is a problem.
Low yielding investment markets
We all know interest rates are low. While this is good news for borrowers it is bad news for conservative investors who prefer term deposits and similar investments. But this is the reality we live in and it is not likely to change in the short term. World equity markets have gone through various mini-cycles in recent months, with periods of investor pessimism alternating with periods of renewed optimism. Cumulatively, however, negativity has been dominant, and after October to December’s large sell-off shares, we have seen some reprieve in recent weeks. Bond investors have also had some relief from previous losses, as U.S. bond yields have fallen, based on the continued uncertainty. In the current climate, investor anxiety may continue to rule the market for some time yet. However, while there are clearly a series of near-term challenges, notably including the impulsiveness of U.S. of economic and foreign policy, there is still a reasonable chance that in the background, the long post-GFC global business expansion is still intact. We remain cautiously optimistic with a preference towards cash, fixed interest and international equities.