2019 – growth down, returns up
Christmas 2018 was not a great one for many investors with an almost 20% slump in US shares from their high in September to their low on Christmas Eve, capping off a year of bad returns from share markets and leading to much trepidation as to what 2019 would hold. But 2019 has turned out to be a good year for investors, defying the gloom of a year ago.
In fact, some might see it as perverse – given all the bad news around and the hand wringing about recession, high debt levels, inequality and the rise of populist leaders.
Then again that’s often the way markets work – bottoming when everyone is gloomy then climbing a wall of worry. The big global negatives of 2019 were:
But it wasn’t all negative as the growth slowdown and low inflation saw central banks ease, with the Fed cutting three times and the ECB reinstating quantitative easing.
This was the big difference with 2018 which saw monetary tightening.
Australia also saw growth slow – to below 2% – as the housing construction downturn, weak consumer spending and investment, and the drought all weighed.
This in turn saw unemployment and underemployment drift up, wages growth remain weak, and inflation remain below target.
As a result, the RBA was forced to change course and cut interest rates three times from June and to contemplate quantitative easing.
The two big surprises in Australia were the re-election of the Coalition Government which provided policy continuity and the rebound in the housing market from mid-year.
While much of the news was bad, monetary easing and the prospect it provided for stronger growth ahead combined with the low starting point resulted in strong returns for investors.
2020 vision – growth up, returns still good
The global slowdown still looks like the mini slowdowns around 2012 and 2015-16. Business conditions indicators have slowed but remain far from GFC levels.
While the slowdown has persisted for longer than we expected – mostly due to President Trump’s escalating trade wars – a global recession remains unlikely, barring a major external shock.
The normal excesses that precede recessions like high inflation, rapid growth in debt or excessive investment have not been present in the US and globally.
While global monetary conditions tightened in 2018, they remained far from tight and the associated “inversion” in yield curves has been very shallow and brief.
And monetary conditions have now turned very easy again with a significant proportion of central banks easing this year.
The big global themes for 2020 are likely to be:
A pause in the trade war but geopolitical risk to remain high
The risks remain high on the trade front – with President Trump still ramping up mini tariffs on various countries to sound tough to his base and uncertainty about a deal with China, but he is likely to tone it down through much of 2020 to reduce the risk to the US economy knowing that if he lets it slide into recession and/or unemployment rise he likely won’t get re-elected.
A “hard Brexit” is also unlikely albeit risks remain. That said geopolitical risks will remain high given the rise of populism and continuing tensions between the US and China.
In particular, the US election will be an increasing focus if a hard-left candidate wins the Democrat nomination.
Global growth to stabilise and turn up
Global business conditions PMIs have actually increased over the last few months suggesting that monetary easing may be getting traction.
Global growth is likely to average around 3.3% in 2020, up from around 3% in 2019. Overall, this should support reasonable global profit growth.
Continuing low inflation and low interest rates
While global growth is likely to pick up it won’t be overly strong and so spare capacity will remain. Which means that inflationary pressure will remain low.
In turn this points to continuing easy monetary conditions globally, with some risk that the Fed may have a fourth rate cut.
The US dollar is expected to peak and head down
During times of uncertainty and slowing global growth like over the last two years the $US tends to strengthen partly reflecting the lower exposure of the US economy to cyclical sectors like manufacturing and materials.
This is likely to reverse in the year ahead as cyclical sectors improve.
In Australia, strength in infrastructure spending and exports will help keep the economy growing but it’s likely to remain constrained to around 2% by the housing construction downturn, subdued consumer spending and the drought.
This is likely to see unemployment drift up, wages growth remain weak and underlying inflation remain below 2%.
With the economy remaining well below full employment and the inflation target, the RBA is expected to cut the official cash rate to 0.25% by March, and undertake quantitative easing by mid-year, unless the May budget sees significant fiscal stimulus.
Some uptick in growth is likely later in the year as housing construction bottoms, stimulus impacts and stronger global growth helps.
Implications for investors
Improved global growth and still easy monetary conditions should drive reasonable investment returns through 2020 but they are likely to be more modest than the double-digit gains of 2019 as the starting point of higher valuations and geopolitical risks are likely to constrain gains and create some volatility:
What to watch?
The main things to keep an eye on in 2020 are as follows:
“Capstone made everything so easy by providing all the templates and support we need which makes me feel comfortable that I am in good hands with my licensee. I would highly recommend Capstone to any fellow Accountant."
Hillyer Riches Accountants
“We have gained assistance with transitioning to the new regulatory environment and provided a new service of strategic financial planning. Capstone have been of tremendous value in assisting with this transition."
“I would recommend Capstone to any accountant seeking to become licenced within the financial services industry. Their personal service and support to me and my firm has been exceptional."
“I joined Capstone Financial Planning in 2003 as I was looking for a Group that could offer a high level of independence and freedom that came from not being institutionally owned."
Willow Wealth Management
“Compliance support and feedback is crucial to our business. The Capstone team are always there to assist us in improving and providing best advice and best practice standards. Their input is always positive and constructive."
Nicholson Financial Planning
“I would happily recommend Capstone as a licensee to other advisers. The Capstone staff are friendly, knowledgeable, and professional, and they are genuinely committed to meeting their advisers' needs. I feel very secure in the knowledge that I have Capstone backing my business.”
Acquire Strategic Advisers
“Capstone’s support has been exceptional and consistent from the time our business made the transition. Capstone is continually trying to enhance their service offerings to their advisers, at both the higher level, and more specific lower levels within our business. They are an exceptional licensee and lead from the front.”
“I can highly recommend Capstone for planners seeking an independent licensee that’s not in your face but provide quality support services. Their service and support is second to none and has allowed us to concentrate on providing our clients with a premium level of service.”
“Having been with Capstone for a number of years, one thing that really stands out is their willingness to help and can do attitude. These are qualities we really appreciate.”