Our view on global and Australian share markets hasn’t changed. They have run hard and fast since their December lows and some sort of short-term pull back is likely. Australian shares look to have run too far too fast – economic growth looks to be slowing and while we expect the RBA to cut rates, that’s probably still a way off.

But as global policy swings to being more stimulatory and growth indicators improve, shares should perform well for the year as a whole. Key to watch for will be further policy support globally and rate cuts in Australia, a decisive end to the US government shutdown dispute and signs the US debt ceiling will be raised relatively smoothly, a bottoming in profit revisions and good earnings reporting seasons globally and in Australia, stronger than expected economic data and a bottoming in PMIs and share markets breaking through resistance on strong breadth.

We continue to see the RBA cutting the cash rate this year and it’s now moving in this direction, but there is still a way to go yet. We thought the first easing was likely to be around August, but it could come as early as June. Our view remains that the cash rate will be cut to 1% by year end in two moves of 0.25% each.

One worry from the Royal Commission recommendations is in relation to mortgage brokers – they have played a huge roll in injecting competition into the mortgage market by making it possible for small lenders without a big shopfront presence to take mortgage business away from the big banks via the mortgage brokers. Moving to having borrowers pay for the services of mortgage brokers at a time when they are cash strapped is likely to significantly reduce competition in the mortgage market, which would be bad for borrowers. So it’s understandable that the Government is not so sure about this recommendation. 

Australian economic events and implications

Australia has just seen yet another week of soft data with a further sharp fall in home building approvals, very weak retail sales, a sharp fall in the services sector conditions PMI, a fall in job ads and the Melbourne Institute’s inflation gauge showing continuing weak inflation in January. Sure the December trade surplus was much better than expected but this was due to a slump in imports. Retail sales and trade look like making a zero contribution to December quarter GDP growth suggesting another quarter of weak GDP growth. The bottom line is that the housing construction cycle is turning down, the downturn in house prices looks to be weighing on retail sales, the labour market appears to be starting to slow and inflation remains MIA.

 

Source: ABS, AMP Capital    

What to watch here this week

Expect a further fall in our housing finance tomorrow. The NAB business survey (tomorrow) and the Westpac Melbourne Institute’s consumer confidence survey (Wednesday) are expected to remain softish.

The flow of Australian December half earnings results will start to pick up, with 44 major companies reporting, including JB HiFi and GPT (yesterday), Transurban and Amcor (today), Cochlear and CSL (tomorrow), South32, Woodside and AMP (Thursday) and Sonic Healthcare (Friday). 2018-19 consensus earnings growth expectations have fallen to around 4% for the market as a whole not helped by slower growth globally as well as locally with a large number of Australian companies warning of tough trading conditions, with resources profit growth running around 8% and the rest of the market around 2%. Resources, building materials, insurance and healthcare look to be the strongest with telcos, discretionary retail, media and transport the weakest and banks constrained. Key issues will be around the impact of the housing downturn, possible changes to franking credits and how the consumer is holding up. 

Outlook for investment markets   

Shares are likely to see volatility remain high with the high risk of a short term pull back, but valuations are okay, and reasonable growth and profits should support decent gains through 2019 as a whole helped by more policy stimulus in China and Europe and the Fed pausing.

Low yields are likely to see low returns from bonds, but they continue to provide an excellent portfolio diversifier.

Unlisted commercial property and infrastructure are likely to see a slowing in returns over the year ahead. This is likely to be particularly the case for Australian retail property.

National capital city house prices are expected to fall another 5-10% this year led again by 15% or so price falls in Sydney and Melbourne on the back of tight credit, rising supply, reduced foreign demand, price falls feeding on themselves and uncertainty around the impact of tax changes under a Labor Government. 

Cash and bank deposits are likely to provide poor returns as the RBA cuts the official cash rate to 1% by end 2019.

The $A is likely to fall into the $US0.60s, as the gap between the RBA’s cash rate and the US Fed Funds rate will likely push further into negative territory as the RBA moves to cut rates. Being short the $A remains a good hedge against things going wrong globally.