2019 – A Year of Challenges & Opportunities

2019 – A Year of Challenges & Opportunities

Happy New Year to you and yours, although can you believe January is almost over? 2019 represents the last year of this century’s teens and the outlook is proving to be challenging, just as it is for adolescents!

In this article we’ll look at some of the markets and the challenges that markets face and investors need to keep a close eye on in the year ahead.

The US

The US equity markets have enjoyed a long bull run since the dark days of the Global Financial Crisis. Markets experts are questioning whether the market can continue to push ahead, based on economic growth or whether the party has already run too long and it’s time to leave.

Sentiment seems evenly split and the pre-Christmas pull back in share prices have taken some of the heat out of an overpriced (by historical standards) equity market. Future positive growth appears to be priced in and so the US market looks susceptible to any bad news or slow-down in the US economy (such as the current government shutdown, but it’s not over yet!).

Challenge – US interest rates look like they are on hold until the market shows more resilience and as such the major risk to the US appears to be a president who is impossible to predict but who does at least have one eye on the impacts of policy on the share market.

China

If you look at the recent global market behaviours, sentiment appears to have shifted to being a balance of consideration of China and the US, rather than solely the US.

Early in 2018 China was trying to manage its overindulgence in debt, low domestic consumption and a moving to reduce pollution. It appeared the government was engineering a controlled slowdown bymid-2018. The impact of the US tariffs on China has, by the end of 2018, suddenly increased the speed and severity of the economic slowdown.

Encouragingly, to reverse the slowdown, the Chinese government has recently loosened monetary and fiscal policy. To my mind, the Chinese have reached a point in their development where they have a lot of control over their own destiny and they also seem more resolved to concessions during trade talks with the US.

Challenge – Trade talks continue, but with pain now being felt in the US, a resolution seems more likely. If an agreement is reached and stimulus starts to encourage demand, the Chinese market could enjoy a very positive 2019.

Europe

Europe has, in many ways, stepped back from the world stage and governments and policy makers there are dealing with internal pressures. As we start 2019 the issues being addressed are as a messy Brexit, the menace of a resurgent and flexing Russian military might and a misbehaving Italian government that wants to buy Ferraris but can only afford Fiats!

The UK is still important to Australian trade and relations and the cost of a messy Brexit could have a negative impact on Australia’s economy.

Challenge – Europe threatens to become self-absorbed and the European economy could stall and impact the global picture. Although their influence has been subdued, make no mistake, unchecked economic issues in Europe would flow on and create issues across global markets.   

Australia

The Australian market has traditionally followed the US market but with China now our largest trading partner, our wagon seems more closely hitched to Chinese fortunes.

Despite the brash political rhetoric to the contrary, we really are not masters of our own destiny and our economy’s reliance on consumer debt, property development and commodities leaves our market very vulnerable to a variety of events. After more than twenty years of economic growth the economy could be impacted by the Hayne enquiry penalising banks or a fall in commodity prices.

Our property market warrants its own discussion point below.

Challenge – Managing our US ties and dependence on China for trade has become very dicey. The prices for commodities have held up reasonably but Australia needs the resurgence in commodity demand to continue and as such, 2019 for our Australian share market seems very reliant on the outcome of Chinese and US trade talks.

Property

The Chinese were buying property all around the world and predominantly in countries bordering the Pacific. However, the Chinese government implemented very strict monetary controls and consequently Chinese property purchases have scaled back dramatically. The side effect of this has increased the risks of dramatic property price falls in south-east Asia, on the North American west coast and in the eastern Australian capital cities.

Challenge – A big stick for the banks in the Hayne report could choke off lending and lead to a hard landing for property. Avoiding a 20% pull back from prior price peaks in Sydney and Melbourne looks almost impossible to engineer at this point. The question is how much further the property market could fall and whether a slow-down in construction and sales could trigger a recession.

Finally…

As an investor it is quite often difficult to sort out the ‘noise’ in flashy media headlines from what is actually going on in the economy. Keeping an eye on economic growth and allocating your investments into a diversified portfolio is the right approach over the longer term.  

High quality businesses will continue to provide good returns to their investors. Ultimately these businesses will be managed well and will not get into trouble because of ancillary issues but will navigate their way through the challenges and come out stronger on the other side.

As we commence 2019, the important thing for investors to determine is whether they hold quality companies or whether they bought in a wave of positive sentiment that is likely to wash back out to sea this year?

Finally, for the Australian investor, whatever happens in China will impact the Australian market. As long as the US market remains relatively steady, 2019 could provide a rally in the Chinese and Asian markets and that would provide a welcome boost to the local market. Something to keep an eye on in the year ahead!

If you need advice on how to manage your investments going forward please contact Chris Kelly on 029633 5530.

 

Please keep in mind that any information provided in this article is of a general nature only. This means that your personal circumstances have not been taken into account. Please ensure you do further due diligence or receive formal advice.

 

Sacha Loutkovsky
sacha.l@orionfg.com.au
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