Presenter - Paul Rickard (Director, Switzer Group)
Date of filming – 1 May 2019
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Hello, and welcome to Switzer Investment Insights, brought to you by nabtrade.
Today, the outlook for the sharemarket in May.
But firstly, a brief recap on how the market performed in April and in calendar 2019.
Fuelled by a strong lead from Wall Street and other international markets, the Australian sharemarket has started the year strongly. In April, the sharemarket as measured by the S&P/ASX 200 added 2.3% in price terms to take the year to date gain to 12.0%. When dividends are included to make an accumulation index, the year to date return is 13.5%.
Across the market, the gains have been reasonably evenly spread. The chart shows the returns from the top 20 stocks, the midcap 50 stocks, which represents stocks ranked 51st to 100th by size of market capitalisation, and the small ordinaries, which represents stocks ranked 101st to 300th by size of market capitalisation. Smaller cap stocks have done best, while the top 20 stocks have lagged a little.
All the industry sectors are positive for the year. Information technology is the best performing sector up 29.5%. It was also the second best performing sector in April.
The largest sector on the ASX, financials, which includes the major banks, regional banks, Macquarie and insurers, gained 4.4% in April. Year to date, it is has returned 10.6% - but this is still below the overall markets 13.5%.
Moving on to the month ahead, what is the outlook for the share market?
Domestically, we have two major events. Firstly, the Reserve Bank is scheduled to meet on Tuesday. There is a widespread expectation that following the low inflation reading towards the end of April, the RBA will reduce the cash rate by 0.25% to 1.25%. This would be the first change in the cash rate since August 2016.
Some economists believe that the RBA is reluctant to cut the cash rate, given that it is arguably at emergency levels, and rather than a cut, may work with the regulator APRA to lower the assessment interest rate banks use to determine the cost of servicing a home loan. This would increase the amount eligible home buyers could potentially borrow and give the depressed home market a boost.
I don’t think the RBA will lower the cash rate yet – but I am in the minority with this view. If they do, it will give a boost to the so called “bond proxy stocks” such as property trusts, infrastructure stocks and other defensives.
The other major event is the federal election. Traditionally, the lead up to the actual election can be a bit of a negative as investors hate uncertainty and the economy slows as consumers defer major purchases. While we haven’t seen it this time – the market has moved higher since the election was called – I still wouldn’t be surprised if we get a bit of a relief rally when the election is over, irrespective of which major party takes government.
Overseas, we have seen stronger than expected company earnings season in the USA, an improved economic outlook and a stronger US dollar. With the US Federal Reserve being “patient” on interest rate increases, Wall Street has hit all-time highs.
The stimulus program in China seems to have produced some early wins. The main area of concern continues to be the Eurozone, with Brexit an unresolved issue.
President Trump is on the cusp of announcing a resolution to the US/China trade war. While this has been well telegraphed, because it has been going on for such a while and the fortune of major US companies is integrally linked with the ability to trade freely, it should still be a positive for US markets.
What will be interesting as we approach the northern hemisphere summer, is whether the “sell in May and go away” story might have a little more credence. It didn’t work too well in 2018, but because the first 4 months in the USA has been so strong, there may be a temptation to lock in some profits.
Putting this all together - while our local market is due for a bit of a correction, I expect the lead from offshore markets to remain positive and the Aussie sharemarket to trend higher. Sometime in the next few months we should 6500.
Thanks for joining us on Switzer Investment Insights brought to you by nabtrade.
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