AMP

2018-19 saw a rough ride for investors, but it turned out okay.

The past financial year saw a roller coaster ride for investors. Share markets plunged into Christmas only to rebound over the last six months. This note reviews the last financial year and takes a look at the investment outlook for 2019-20.

Key Points

  • 2018-19 saw solid returns for diversified investors, helped by a sharp rise in share markets in the last six months & solid returns from most assets, except cash.

  • Key lessons for investors from the last financial year were to: turn down the noise around investment markets, maintain a well-diversified portfolio; and cash continues to provide low returns.

  • A pick-up in global growth, renewed monetary easing, an absence of significant economic excess globally and okay equity valuations should support returns over the year ahead. But they are likely to be constrained with bouts of volatility as the US trade conflict impacts and risk remains around the Australian property market.

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Australian growth will be constrained but here’s nine reasons why recession is unlikely

Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital

For some time our view has been a less upbeat on the Australian economy than the consensus and notably the RBA. The reasons were simple. The housing cycle has turned down and this is weighing on consumer spending. And this is at a time when the risks to the global economy have increased as the trade war threat has ramped up again. All at a time when high levels of underemployment are keeping a lid on wages growth and, along with technology and competition, inflation

But the gloom around the Australian economy seems to have gone over the top lately with all the talk around rate cuts adding to the sense of malaise and more and more talk about a recession being inevitable. There must be some positives around. And there are! So, to inject some balance into the debate around Australia here is a list of positives. They are partly why we don’t see Australia as being about to plunge into recession.

The key points are as follows:

  • Australia’s current accounts deficit has collapsed

  • The Australian Dollar helps stabilise the economy

  • The drag from falling mining investment is over

  • There is scope for extra fiscal stimulus

  • Infrastructure spending is booming

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The $A still has more downside, but a lot of the weakness is behind us

Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital

While some have expressed surprise at the recent resilience in the value of the Australian dollar around the $US0.69-0.70 level despite weak Australian growth and Reserve Bank rate cuts, from a big picture sense it has already fallen a long way. It’s down 37% from a multi-decade high of $US1.10 in 2011 and it’s down 15% from a high in January last year of $US0.81. So, having met our long-held expectation for a fall to around or just below $US0.70 and given its recent resilience now is an appropriate time to take a look at its outlook.

The key points are as follows:

  • The Australian dollar likely faces more downside as Australian growth is weaker than US growth and the RBA is likely to cut more than the Fed. However, downside may be limited to around $US0.65 given that the $A has already had a large fall, short positions in the $A are large, the iron ore price remains high (for now) and the Fed is also heading towards rate cuts.

  • Given the downside risks for the $A and that being short the $A is a good hedge against threats to the global outlook it still makes sense for Australian investors to maintain a decent exposure to foreign currency via un-hedged global investments.

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The nine most important things I have learned about investing over the past 35 years

Dr Shane Oliver
AMP Capital

I have been working in and around investment markets for 35 years now. A lot has happened over that time. The 1987 crash, the recession Australia had to have, the Asian crisis, the tech boom/tech wreck, the mining boom, the Global Financial Crisis, the Eurozone crisis. Financial deregulation, financial reregulation. The end of the cold war, US domination, the rise of Asia and then China. And so on. But as someone once observed the more things change the more they stay the same. 

The key points are as follows:

  • There is always a cycle

  • The crowd gets it wrong at extremes

  • What you pay for an investment matters a lot

  • Getting markets right is not as easy as you think

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Inflation undershoots in Australia

Dr Shane Oliver, AMP Capital.

Surprisingly weak Australian inflation has led to expectations the Reserve Bank will soon cut rates. But what’s driving low inflation? Is it really that bad? Why not just lower the inflation target? Will rate cuts help?And what does it mean for investors?

 The key points are as follows:

  1. Surprisingly low inflation in Australia has increased the pressure on the RBA to cut interest rates again.

  2. We continue to see the cash rate falling to 1% by year end and now see the first cut coming as soon as May.

  3. For investors, it’s going to remain a low interest rate environment for some time to come.

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How are Australia’s states and territories tracking?

Diana Mousina, Senior Economist, AMP Capital.

The attached note looks at the recent performance of Australia’s states and territories.

The key points are as follow:

  • An end to the fall in mining investment is helping to stabilise growth in Australia’s mining states and territories (WA, Qld and NT to a lesser extent) while a slowing housing sector is starting to act as a drag on NSW and Vic. Tas is benefitting from a lift in population growth and housing “refugee” demand from Sydney and Melbourne. Growth in SA and the ACT has been stable.
  • After years of growth divergences across the states and territories, expect a convergence in growth across the regions over the near-term which means more comparable activity across the nation.

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