Top 5 investment market themes to watch in 2019

28 Feb Top 5 investment market themes to watch in 2019

We believe there are a number of core themes that are likely to drive investment market conditions in the coming year. Here are five that, for better or worse, may be part of the investment landscape in 2019.

Global economic downturn in investment markets

This time last year, the world appeared to have good prospects for continued synchronised global economic growth. But significant geo-political uncertainty over the past year resulted in drastic market turmoil, and negative returns across most major markets. As this year begins, there are genuine concerns for the global growth picture Bloomberg surveys¹ published in December put the chances of recession in 2019 in the US at 15%, in the Eurozone at 18%, in the UK at 20% and in Japan, at 30%.

Recession concerns are not mainstream, but there are indicators of a possible synchronised global slowdown. In April last year, the International Monetary Fund (IMF) forecast global economic growth at 3.9%, but by October, it had lowered that estimate to 3.7%. The IMF sees the US slowing from 2.9% growth in 2018 to 2.5%; the Eurozone easing from 2% in 2018 to 1.9% in 2019; Japan slowing from 1.1% growth in 2018 to 0.9%; and China softening from 6.6% in 2018 to 6.2% in 2019.²

The Chinese economy, which has been the prime locomotive of global growth since the GFC slowed to 6.5% in the third quarter of 2018³, the weakest pace since the global financial crisis. In recent months Beijing has unveiled a raft of policy measures, including cuts in banks’ reserve requirements to boost lending, tax cuts and steps to fast-track infrastructure projects.

Stimulus should also come in the US, with the US Federal Reserve expected to pause its mooted program of raising interest rates – the Fed lifted rates in December 2018⁴, but cut the number of expected rate hikes in 2019 from three to two, in comments widely construed to infer they would only hike rates if US economic data improved enough to justify it.

In December, the Fed lowered its median projection of US economic growth in 2019 from 2.5% to 2.3%⁵. Forecasting US growth is difficult, as the impact fades from huge tax cuts delivered at the end of 2017, potentially offset by reduced regulation within the financial sectors coming into consideration. Also, in February of 2018, Congress passed an increase in federal spending of US$300 billion over two years⁶: the extra spending is starting to kick in. Although the US government shutdown is likely to temper the positive impacts this may have.

Trade and tariff tensions in investment markets

The prospect of a ‘full blown’ trade war between the US and China continues to affect markets, despite the diplomatic agreement of a 90 day ‘truce’ between US president Trump and China’s president Xi Jinping at the G20 summit in November. During this time, no new tariffs will be introduced as talks between the two countries are held. While the truce expires on 1 March, there are still large disparities between the positions of both parties – particularly in relation to intellectual property theft and certain elements of the current trade structure.

As the US and China continue efforts to resolve their differences, a President Trump decision to increase tariffs on Chinese imports – chasing a pyrrhic victory on trade – is not out of the question. The rest of the world simply does not want to see that, because the free flow of goods is crucial to world trade, the global economy and therefore, global growth.

Data shows that China’s export-oriented manufacturing economy is hurting already from the trade war(7). The million-dollar question is whether the country will again prime the stimulus pump through infrastructure and construction projects to make up for this, and keep its 6%-plus growth target(8) intact.

Can commodities make a comeback in investment markets?

From here flows another theme of 2019: whether commodity prices can rebound after a dire fourth quarter of 2018. Oil prices continued to slide throughout December as demand weakened during a period of oversupply in the US, driving investors to safe haven assets such as gold.(9)

If we see Chinese commodity-intensive infrastructure stimulus, Australia’s big commodity producers are likely to benefit. Behind the headline figures of demand, the interesting edge that Australian bulk commodities have developed is likely to continue in play, as China switches its focus from growth-at-all-costs to more environmentally sustainable growth. The country is both constraining supply from its less environmentally justifiable domestic supply sources, while simultaneously paying a premium for higher-quality Australian products, particularly iron ore and coal.(10) Australia’s miners could well surprise in 2019 – particularly if the “improvement in the second half” prediction holds up.

The slowdown in our housing market

The housing market downturn in Australia is intensifying. Property research firm CoreLogic says that national dwelling prices fell 4.8% in the year to December 2018(11), led by Sydney and Melbourne, which were down 8.9% and 7% respectively.

According to CoreLogic, Sydney’s housing market is down 11.1% since its peak in July 2017 which has eclipsed the previous record peak-to-trough decline set during the last recession when values fell 9.6% between 1989 and 1991. The research firm says Melbourne dwelling values peaked four months later than Sydney, in November 2017, and have since fallen by 7.2%.

Other factors such as the upcoming federal election, which is expected to result in reduced housing credit demand if the Labor Party pushes through changes to negative gearing, could see a further setback for the sector. It will not impact existing or new dwellings however.

While the flow-on effect of a housing market downturn into domestic consumption, construction activity, employment, banks’ and retailers’ share prices and government revenues can’t be downplayed, asset price falls (in shares and property) do not have to lead to recession. Housing is a market like any other, and where sellers have held the upper hand for a long time, buyers are suddenly finding themselves dealt back into the game.

Political risk in Australian investment markets

Once upon a time, many people did not think there was such a thing as political risk in Australian investment markets.  But there is, and the 2019 federal election will bring it into focus. The policy changes being proposed by the Australian Labor Party in negative gearing, capital gains tax and treatment of excess franking credits could all have serious downside impacts on investors – leaving aside any discussion about the merits of the policies.

The other aspect of the 2019 federal election is that it’s likely to see more minor-party and independent parliamentarians elected, in both houses. While many people welcome this greater diversity of viewpoint, many others see a polity less capable of allowing a government to actually govern.