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Are there far, far better things ahead than any we leave behind? C.S. Lewis may have thought so, but Australian market strategists are all thinking about 2019 in starkly different terms.
Whether they’re constructively cautious, quietly optimistic, or simply more positive than the market suggests about the year ahead, these five strategists have unique views about where the ASX is going.
None were comfortable predicting how many points the market would chalk up by end 2019, or providing an estimate around how much upside, or downside, that Australian investors could expect to see. There are too many question marks. But all were happy to leave their personal, and very timestamped, mark on this piece at the end of December 2018. Opinions have been condensed for brevity.
The general withdrawal of credit means we could expect growth to be the primary concern for markets in 2019. Growth-exposed sectors are likely to be those with the most active opportunity and the most risk next year. So, I’m thinking internationally-exposed healthcare, materials and energy stocks, all very leveraged to growth.
Despite the major factor of the Royal Commission, and the regulatory changes the banks are facing, one of their key problems is actually the fact they look like they are ex-growth. They’ve emptied all their hollow logs, and given their fairly direct leverage to economic growth, their growth prospects are looking very constrained for the coming years. They are likely to grow with GDP, so around the 3 per cent-mark, rather than that 8 per cent-mark the broader market has grown in previous years.
The US is positive, at worst neutral, in most cases. For Australia, which bobs like a cork on the global trade sea, that means the overall prospects are mostly positive. But because of that interplay between growth and higher interest rates, and the sentiment it’s likely to bring about, I expect volatility next year to be even higher.
The biggest outperformance tends to come from what we can’t see developing over the year. Two of the most beaten up sectors relate to consumers – discretionary and staples. Consumer discretionary stocks in particular have been absolutely thumped since August. Given that defensive positioning, the market is probably pricing a very weak scenario, and it could be discretionary and staples that provide the biggest surprises. If we do see any surprise, the performance in those sectors could be disproportionately good. But making forecasts in this environment is very difficult.
Our IT sector is small, but if the IT sector in the US falls away, a lot of our guys will go with them. It’s not a reflection of our IT companies, but if the FAANG stocks [Facebook, Amazon, Apple, Netflix, Google] fall away, there tends to be selling in sympathy for us. That’s no slight at all on the potential stories our high-flying IT stocks could deliver.
In terms of materials and energy, it simply comes down to trade. Talking vaguely here, because it’s truly where we’re at right now, if trade talks are successfully negotiated, it will lend support to energy prices. Whether that’s the case, the BHPs, Rios and Woodsides of this world will see upside. We will be watching that, Brexit and Italy. But the China issue is the number one thing.
More immediately, a catalyst for growth here could be increased confidence from China, and ditto as well for India, which is an important trading partner as well. More medium-term, we get the NSW and Federal political votes out of the way between March and May – we’re talking about this affecting multiple sectors here, but the obvious one for investors is energy.
This is likely to be a year where defensives shine and investors pay a premium for stable and reliable cashflows. In particular, utilities and property, both office and industrial, are likely to perform well.
There are signs the domestic economy is deteriorating. We’ve seen seven months of slowing growth in new vehicle sales and 12 months of house price falls. Money supply is at a 26-year low and mortgage lending is expected to do a soft 5-6 per cent next year. The sectors likely to be the worst are the domestic-facing ones such as retail, residential housing and media.
Global growth rolling over would be the single biggest threat to the market. The next macro phase represents a more difficult environment for equities, which is the movement from rising inflation and rising growth to rising inflation and slowing growth.
Financials are likely to face headwinds into 2019. Companies leveraged to property development and house prices are unlikely to enjoy high levels of growth over the coming year.
If housing prices continue to fall and wage growth stays low, confidence will likely be lower and therefore consumer staples and other defensive sectors should fare better than sectors correlated with discretionary demand.
Rising US interest rates and the unwinding of QE [quantitative easing] continues to put pressure on global markets, and it is unlikely Australian markets will be left unscathed as investors reprice risk relative to the risk-free rate.
A resolution of global trade tensions should support Australian exporters. Any improvement in wage growth will give confidence to retailers and other sectors dependent on consumer confidence. Should a Labor Government succeed in passing legislation in restricting negative gearing to new properties, there may be a short-term boost to new property prices and development.
The January narrative of ‘synchronised global growth’ has now firmly switched to ‘synchronised global slowdown’. Heading into 2019, we focus on wealth preservation and playing defence with a conservative allocation to risk assets, unless global policy makers capitulate and move to boost liquidity. The second half of 2019 could be different if the global economic slowdown leads policymakers towards stimulus. Capitulation from major central bankers choosing to boost liquidity, fiscal stimulus in Europe and a weaker US dollar would all be positive for global growth and could reboot risk assets.
We favour the healthcare sector with defensive, quality cashflows adding resilience to portfolios. In volatile markets another way to slice and dice the equity market is looking at style/factor exposure rather than sectors. We look to long low beta/minimum volatility and quality in terms of factor exposure, while staying clear of momentum and high beta. We also look to bond proxy stocks to provide reliable cash flows and predictable returns adding to portfolio defence.
We are cautious of the banking sector. While the 9-11 per cent gross dividend yield provides valuation support it is difficult to see a catalyst for a broad sector upgrade. As the decline of the east coast housing market continues to gather pace the banks will remain victims to offshore selling and earnings headwinds given their leverage to the housing market.
We expect growth stabilisation to be a top policy priority for China next year with fiscal and momentary stimulus playing a key role. On that basis the mining sector could benefit if infrastructure spending is ramped up. However, be aware that stimulus measures will take time to feed through to the real economy and recent Chinese data suggests the economy has not yet bottomed.
Chinese policymakers are also focusing on quality over quantity in terms of economic growth and switching from an export-driven economy to a consumption/domestic demand-led model. With this in mind stimulus measures are likely to focus on boosting domestic demand as well as increased infrastructure spending. This could provide support for ASX-listed stocks with leverage to the Chinese consumer.
Laura Daquino is a financial journalist at InvestSMART. To access more share research from InvestSMART, start a 15-day free trial.