Market Update: December 2019

Share markets generally rose higher in November, helped by optimism regarding a US/China trade deal and reasonable economic data. Both US and Australian markets hit record highs, which brings 12-month returns for Australian equities up to a whopping 26%, as summarised below:

At the time of writing, it looks like it will be an excellent calendar year for 2019. If we think back to this time last year we were in the midst of a 15%+ decline in share markets around the world, as fears of an emerging trade war together with the US raising interest rates to curb inflation were taking hold. As this played out through January and we saw a brief slowdown in the world economies, the world’s central banks provided (yet again) more stimulus to share markets and we have seen a stunning year of gains.

The chart below provides a snapshot of 2019 versus 2018, and also a forecast from AMP Capital of more good times to come.

In terms of the Australian market, the chart below shows the main contributors to the overall gains this year, driven mainly by financials and materials sectors. This may be no surprise given the large proportion of our market is comprised of these sectors, however, health care only forms a small part yet was almost as big a contributor as materials. Overall we saw all sectors making a positive contribution for the year.

Further to this, at a stock level, CSL has by far been the biggest contributor to the stock market performance in 2019. This company continues to defy ‘value investors’ and deliver strong growth. BHP was next best and surprisingly CBA is in third place. This is mainly due to it coming off a fairly low base last year as a result of the Royal Commission and a slowdown in residential property lending.

Outside of the share markets, we have seen commercial property continue to do well, as investors seek the relatively high yield and we haven’t had too many issues with regards to vacancy rates and valuation pressures. Cash, Term Deposits and the Australian dollar were all poor reflecting record-low interest rates. Those fixed income sectors providing additional yield above cash rates, such as hybrids and corporate bonds, have been an excellent source of low risk return. Moving forward this space is becoming increasingly difficult to add new investment into, given the strong demand for assets of late which has pushed up prices (and hence yields down).

The big global themes for 2020 are likely to be:

  • Global growth to stabilise.
    Business conditions have been improving over the last few months which suggests that the record-low interest rates may be gaining traction.
  • Geopolitical risks to remain high.
    Trump has indicated that a firm trade deal may be postponed until after the 2020 election and in the UK, whilst a “hard Brexit” is unlikely, the risks remain.
  • Both inflation and interest rates to remain low.
    Whilst global growth is expected to pick up it won’t be overly strong and so inflationary pressure should remain low.

Closer to home and what we expect is continued strength in infrastructure spending and constrained growth of around 2%, weighed down by a dip in housing construction and the impact of drought. With the economy still not hitting its inflation target the RBA will most likely cut the official cash rate again! This should provide renewed support for Australian shares which we expect to do okay, as well as the commercial property sector. Ongoing low interest rates will most likely flow on to the residential property market with the availability of cheap credit and a growing fear among many of missing out.

This will be the last update for 2019 so I wish everyone a Merry Christmas and a prosperous New Year.

– Peter Farlie