With the economic cycle in the US and globally closer to the peak rather than the bottom, is the bottom about to fall out of the share market?

Share market and economic cycles are normal. There’s even an investment clock that charts the boom to bust cycle that can often characterise the peak and bottom of these cycles. While the US stock market is closer to its peak than the bottom of the economic and earnings cycles, it’s important to remember that other markets are at a different part of its cycle and can present opportunities.

Even with the US stock market, near all-time record highs, there are still opportunities for the nimble investor. Time frames for investing closer to the peak become shorter, especially if chasing growth.

Here in Australia, with the domestic economy slowing, the opportunities are in stable cashflow companies and global leaders, which should benefit as the $A falls.

US earning peaking

From a global perspective, China’s market could present some opportunities in 2019, with its cycle diametrically opposite to the US equity cycle. While US earnings growth and margins appear to be peaking, China’s share market looks to be close to a bottom and could therefore be worth considering for investors seeking global exposure.

We also like Japan as a turnaround story. On a macro level, the long period of deflation looks to have come to an end, productivity is improving and from a fundamental viewpoint, improved returns on equity are on offer for investors.

Individual stock picking in foreign markets can be difficult, so for investors a simple option to gain broad market exposure can be via ETFs or mFunds. Our ETF Filter and mFund Filter can help sort through the array of options by asset class, sector, issuer and fees. 

Australian retail, housing and banks to suffer

Looking closer to home, Australia’s retail sector is already weak and there are indicators showing it’s unlikely to improve any time soon, with lower motor vehicle sales growth, falling house prices and money supply growth at a 26-year low.

With State and Federal elections slated over the next six months, investors will need to keep a close eye on consumer confidence, which tends to be timid ahead of major elections. Falling consumer confidence, tighter lending standards and the Reserve Bank of Australia’s reluctance to cut interest rates further, mean we are also likely to see house prices continue to fall nationally in 2019. Investors may therefore wish to consider remaining underweight housing stocks and banks.

Defensive stocks likely to see gains

The 2018 drought across Australia has seen many agricultural stocks fall. While a rebound in crop volumes is not likely to hit until 2020, 2019 will be the year to pick up some agricultural stocks at the bottom of the cycle.

In times of volatility, other defensive sectors to consider are telecoms, utilities, healthcare and staples.

My pick this week

Death volumes are the most significant driver of activity in the funeral industry. While morbid, early indications are that it’s going to be a big flu season this year. March 2019 numbers show over 10,000 reported incidents of influenza. This is three times higher than the same time last year. Propel (PFP) has a strong track record as the second largest funeral service provider in Australia. While much of the growth is through acquisitions and consolidating the market, it has a good track record of cash flow generation.

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