DECEMBER 2019 QUARTER MARKET OVERVIEW & MARKET OUTLOOK 2020
By Nicola Beswick
We are pleased to provide our Market Overview for the December 2019 quarter and our Market Outlook for 2020.
On just about every measure, 2019 did not turn out the way many had forecast with financial markets, and geopolitics definitely confounding popular opinion.
At the start of 2019, the US-China trade war, the uncertainty of Brexit, slowing expectations for global growth, and a multitude of geopolitical uncertainties led to a consensus of a cautious outlook. Here in Australia, a change of Federal Government looked almost inevitable, causing further uncertainty for investment markets.
Understanding this backdrop, many professional forecasters a year ago were particularly conservative in their predictions for investment returns in 2019.
However, by the end of 2019, the US and China had reached a tentative trade consensus, the UK is set to leave the EU, and here in Australia, the Morrison-led Coalition defied every poll to secure another term removing any uncertainty around franking credit policy. In addition to this, domestic interest rates fell from already historic lows. These events propelled investments markets that produced solid returns in 2019, as shown in the table below:
|December Quarter 2019||Half-Year to December 2019||Calendar Year 2019|
|Australian Shares (S&P/ASX 200 Accumulation Index)||0.68%||3.06%||23.40%|
|International Shares (MSCI World ex–Aus in AUD)||4.16%||8.95%||27.86%|
|A–REITs (S&P/ASX 200 A–REIT Accumulation Index)||-0.99%||-0.05%||19.36%|
|S&P/ASX Small Ordinaries Accumulation Index||0.76%||3.89%||21.36%|
Incredibly, for Calendar Year 2019, the Australian share market, as represented by the S&P/ASX 200, returned a whopping 23.40%, the fourth-highest Calendar Year return of the Australian share market in the last 20 years.
Other important figures at 31 December 2019 compared to the previous year, and half year were:
|31/12/2019||30/06/2019||31/12/2018||Calendar Year 2019|
|RBA cash rate||0.75%||1.25%||1.50%||-50.00%|
|90-day Bank Bill Swap rate||0.90%||1.29%||2.02%||-55.00%|
|10-year Government Bond rate||1.31%||1.32%||2.32%||-43.53%|
|Australian dollar||US 70.16c||US 70.13c||US 70.52c||-0.06%|
Growth sectors in the Australian share market outperformed in 2019 with the Healthcare sector returning 44.9%, and Information Technology returning 37.4%, posting the highest total returns of the 12 General Industry Classification (GIC) sectors in 2019. Conversely, the big 4 banks were a drag on the ASX in 2019 with Financials returning 13.6%, the worst industry performer in Calendar Year 2019. The relative weakness of the banks was on the back of weak operating trends and governance issues.
With the banks representing 23.5% of market capitalization of the Australian market, the fall in bank stocks in late 2019 was a key reason the ASX lagged Global equities. For Calendar Year 2019, Global shares yet again outperformed Australian Shares, returning 27.86% in AUD. 2019 was the fifth Calendar Year in a row International Shares outperformed Australian Shares.
Looking into 2020, Global growth, which weakened during 2019, appears to be stabilizing. Global inflation is likely to remain benign, helped by the 2019 growth slowdown, but oil prices are on the rise due to the current conflict between Iran, and the U.S, which could hurt Global growth. Domestically, residential property prices have stabilized, and we appear to have a stable political environment, but domestic growth is anaemic. In all likelihood, the RBA will drop interest rates further in an attempt to stimulate growth.
After exceptionally strong returns in 2019, valuations now look stretched. It would not be unreasonable to expect periods of sharp volatility in 2020, with returns likely to be far more subdued.