US optimism sustains Australian shares
The final weeks of 2019 were filled with bad news but the share market continued to perform strongly.
In the final weeks of 2019 Australian cities choked on bushfire smoke, the festive shopping season was labelled the weakest since the Global Financial Crisis, and the Federal Government admitted its earlier forecasts for the economy were overly optimistic.
Yet the ASX 200 gained 2.46% over the month to early January, led by resources, healthcare and IT stocks. Over the three months the index rose exactly 5%.
Mercer’s Head of Investment Strategy, Gwion Moore, says these domestic gains are part of a larger global story.
“There’s a renewed optimism globally which has really been driving the overseas equity markets,” he explains. “That, in turn, has helped Australia.”
Key amongst the reasons for optimism is the growing belief that the United States and China may reach an agreement on trade, bringing to an end the so-called ‘trade war’ running since 2018 that has seen both sides impose tariffs on the other’s goods.
“We’ve had a partial deal already that rolls back some of the tariffs,” says Moore. “We’re expecting a more comprehensive agreement in the coming weeks.”
In the United States, the Dow was up 3.02% over the month to early January and up 9.38% over three months. The S&P 500 performed even more strongly, gaining 3.34% over the same month and 11.45% over three months.
Meanwhile, in the United Kingdom, the election of Boris Johnson and the Conservatives brightened the mood of investors by bringing an end to the Brexit conflict.
“There’s now more financial certainty there, given that the recent election has essentially closed the debate on whether or not the UK is going to be leaving the European Union,” Moore says.
It isn’t all roses
Although the Australian share market recorded gains in December and early January, Moore says the pace of growth has lagged behind international markets with sluggish GDP growth and consumer confidence at its lowest in years.
“While it’s true that Australia takes its trading cues from overseas, the weakness of our domestic economy has undoubtedly been a drag on shares,” he says. “On top of that, the employment market has been weaker, with a small increase in unemployment and the rate of hiring has been declining.”
Moore says the Reserve Bank’s decision to cut interest rates three times in 2019 was intended to stimulate the economy, yet consumers have not been spending cash. By and large, Australians haven’t been obtaining extra credit, either.
“The argument has been made that people look at interest-rate cuts and they interpret them as ‘Difficult times are ahead, perhaps we should be a little more cautious’,” Moore says. “Compared with international peers, the Australian consumer already has quite high levels of debt, so the ability to boost the economy by taking on more debt is limited.”
The one area where interest rate cuts seem to be having an effect is the housing market. According to CoreLogic, national house prices rose 1.7% in November (the largest monthly gain since 2003) and 1.1% in December. There is a widespread expectation that prices will continue to rise in 2020 as both owner-occupiers and investors take advantage of low interest rates to enter the market.
The year ahead
Moore says there is a good chance the RBA will cut cash rates again, possibly as soon as February.
“The market certainly has that priced in,” he says. “The same underlying themes that led to the last interest-rate cut remain: we have above-target unemployment, below-target inflation.”
This summer’s bushfire crisis also holds concerns for its potential to hit the economy. “That’s been estimated to knock 0.1% to 0.2% off GDP,” says Moore.
The outlook overseas is even more difficult to predict. As Moore puts it, the only certainty is uncertainty.
“I’m anxious about the unusually high levels of confusion that might be associated with the upcoming presidential election in the United States, it’s affecting everything,” he says. “The US-China trade negotiations have occurred in the context of Trump’s re-election campaign, and I think most people would conclude that the recent events in Iraq and Iran were not entirely unrelated to the US presidential cycle.”
While the United State economy remains strong, Moore says its currency could weaken this year. “The Australian dollar has been falling versus the US dollar for the past seven years,” he says. “This has been driven as much by US dollar strength as Australian dollar weakness. The US dollar is now over-valued against most major currencies and there is a good chance this trend will turn over the medium term.”
If that happened, it would be bad news for investors and retirees with exposure to the United States through shares or superannuation portfolios. “On the upside,” Moore says, “it’s good news for Australians looking for a Disneyland holiday.”