Markets, News, and Views…..
What a difference a year makes…….. markets started 2019 coming off a terrible few months for equities as fears of global recession dominated investors’ thinking. But by the end of 2019 equity markets had staged a huge rally and investors were becoming more confident of stronger growth in 2020. Sharemarkets have continued to rise into January 2020 with new record highs eclipsing 29,000 points on the US Dow Index and 7,000 points on our own All Ordinaries Index.
The biggest development triggering this change of sentiment was central banks around the world moving to ease monetary policy throughout 2019. In the US, Europe, China and Japan there were more rate cuts and liquidity support. Here in Australia, the RBA cut the cash rate from 1.5% to a new record low of 0.75% and flagged the possibility of QE. As the Table below shows, all asset classes performed very strongly and even Government Bonds got in on the act as a result of the rate cuts which were unexpected even in late 2018.
The other key development was the US/China agreement to sign the Phase One trade deal, which gave markets an extra fillip in the closing months of the year. This was duly completed earlier in January 2020 with markets reacting positively again.
Unsurprisingly after such a year, we should not expect the same again as we look ahead into 2020. Equity markets have already priced the impact of the interest rate outlook and now need profit growth to push higher. However, the outlook is for subdued growth around the world, including here in Australia. There may be some further improvement in key growth indicators in coming months, but these do not look likely to be strong enough to materially change the outlook for soft growth, low inflation and slow progress on reducing unemployment rates.
In this context we see lower returns across all asset classes, with equities and bonds delivering little more than income returns and significantly lower capital growth than was saw in 2019. Australia’s relatively high dividend yields still make our local equity market look reasonably attractive though, so a significant pull-out also looks unlikely. It must be said though that opinions are divided with some analysts citing weakness in Australia’s economic and corporate earnings outlook as a reason to be extra cautious while as many are of the view that Australia’s RBA cash rate will drop further, particularly in light of the devastating bushfires, and this will be enough to encourage further investment in equities.
Either way, geo-political risks will continue to be a source of worry from time to time. As the year opens, the US has launched strikes against key Iranian military officers with warnings of more to come. The US election campaign is likely to be one of the nastiest and most divisive in history and will at times disturb market sentiment. Brexit may also cause some turmoil as it unfolds.
Sources: Thomson Reuters, Bloomberg, Quilla Consulting.