Market update with David Robertson

The glass half full view of the world at the
end of 2019 is still intact, but the bushfire tragedies, the coronavirus outbreak, and below
average business confidence is challenging the outlook. An update on our view at the
start of the new decade. The 20’s kicked off with optimism that the
global deceleration had turned the corner, with forecasts of global growth dipping to
3% but edging higher to 3 ½ % through 2020 and the domestic outlook was consistent with
a global recovery thanks to a truce on the Trade Wars. Local data was also positive through
January, with employment growth running at 2.1 % year on year, comfortably ahead of population
growth of 1.6 %. The unemployment rate is down to 5.1 % at
year end. This good news, together with an uptick in the inflation rate and more gains
for property markets, was enough to keep the RBA on hold in February and their language
is still stoically positive, but the Reserve Bank did admit that the impact of the bushfires
and the coronavirus outbreak will weigh on domestic growth. Just how large this impact
will be and how lasting is the unknown part of
the equation, but a negative read for first quarter GDP can’t be ruled out. Far less likely is two consecutive negative
quarters, a recession; so while the impact of the virus on China will be significant,
and the combined impact with the fires will be very challenging for local tourism and
other service exports, we do need to consider the recovery, not just the downturn. Similarly, for housing, the downturn through
2018 was very unsettling, but the inevitable recovery shows the longer term trend. The
gains in Sydney and Melbourne are clear in the chart; but in January, every capital city
was stronger, and regional property rose 0.7 % for the month. Stronger property prices
are one consequence of last year’s RBA rate cuts, which will help to offset slower domestic
demand; but another impact from the cuts was a lower Aussie Dollar, which did recover back
above 70 cents at year end, but is back around 67 ½ cents now, having been hit by the prospect
of China slowing as it tries to contain the virus. The lower Aussie dollar will continue to help,
but as for its direction from here, we’ll continue to respect 66 ½ cents as a key support
level, but the brief run above 70 cents over New Year’s could be a portend for upside
risks, so the 70 cent barrier is also a key trigger level to be monitored. The third beneficiary of these record low
interest rates is stock markets, with our ASX 200 up over 18 % last year, and further
gains seen in January: so having posted a record of 7100, you can see it’s been a
very impressive decade for stocks, even though ours have lagged the USA, especially the Nasdaq. The twenties are off to a roaring start, but
increased volatility in equities and other markets is likely, until the impact of coronavirus
is more clear, including locally through tourism and consumer confidence in particular.

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