Market Watch

At its meeting today, the Board decided to leave the cash rate unchanged at 0.75 per cent.

The outlook for the global economy remains reasonable. There have been signs that the slowdown in global growth that started in 2018 is coming to an end. Global growth is expected to be a little stronger this year and next than it was last year and inflation remains low almost everywhere. One continuing source of uncertainty, despite recent progress, is the trade and technology dispute between the US and China, which has affected international trade flows and investment. Another source of uncertainty is the coronavirus, which is having a significant effect on the Chinese economy at present. It is too early to determine how long-lasting the impact will be.

Interest rates are very low around the world and a number of central banks eased monetary policy over the second half of last year. There is an expectation of a little further monetary easing in some economies. Long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are at historically low levels. The Australian dollar is around its lowest level over recent times.

The central scenario is for the Australian economy to grow by around 2¾ per cent this year and 3 per cent next year, which would be a step up from the growth rates over the past two years. In the short term, the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth. The household sector has been adjusting to a protracted period of slow wages growth and, last year, to a decline in housing prices, with the result that consumption has been quite weak. Following this period of balance-sheet adjustment, consumption growth is expected to pick up gradually. The overall outlook is also being supported by the low level of interest rates, recent tax refunds, ongoing spending on infrastructure, a brighter outlook for the resources sector and, later this year, an expected recovery in residential construction.

The unemployment rate declined in December to 5.1 per cent. It is expected to remain around this level for some time, before gradually declining to a little below 5 per cent in 2021. Wages growth is subdued and is expected to remain at around its current rate for some time yet. A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

Inflation remains low and stable. Over 2019, CPI inflation was 1.8 per cent and underlying inflation was a little lower than this. The central scenario is for CPI inflation to be around 2 per cent in the near term and to fluctuate around that rate over the next couple of years. In underlying terms, inflation is expected to increase gradually to 2 per cent over the next couple of years.

There are continuing signs of a pick-up in established housing markets. This is especially so in Sydney and Melbourne, but prices in some other markets have also increased. Mortgage loan commitments have also picked up, although demand for credit by investors remains subdued. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality. Credit conditions for small and medium-sized businesses remain tight.

The easing of monetary policy last year is supporting employment and income growth in Australia and a return of inflation to the medium-term target range. The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries. Lower interest rates have assisted with the process of household balance sheet adjustment. They have also boosted asset prices, which in time should lead to increased spending, including on residential construction. Progress is expected towards the inflation target and towards full employment, but that progress is expected to remain gradual.

With interest rates having already been reduced to a very low level and recognising the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting. Due to both global and domestic factors, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments carefully, including in the labour market. It remains prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

Source: Reserve Bank of Australia, February 4th, 2019

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Phone: +61 2 9551 9720
Email: rbainfo@rba.gov.au

Movements on the global and domestic stage in 2019 have driven home some tried-and-tested lessons in investing, markets, and keeping your cool.

Each year, we see new leaders, new policies, and new conflicts which impact markets. At the ground level, it can be tempting to get caught up – or overwhelmed – by the micro.

However, if we take a look at some key themes and events from the year that was, we see that some evergreen investment principles have yet again applied to 2019, and likely will for 2020.

2019 in hindsight

1. Highs and lows

Seasoned investors will be familiar with Warren Buffett’s much-used quote: “Be fearful when others are greedy, and greedy when others are fearful.” A retro look at the last 12 months tells us, yet again, that expression rings true.

This time a year ago, there was a lot of negative sentiment about share markets. At home and overseas, shares fell sharply until about Christmas last year. By Christmas eve, the US share market had fallen 20 per cent from its high in September.

By the start of this year, markets had promptly turned around, and this year turned out to be a reasonably good year for share markets. It was a classic case of the market bottoming out when negative sentiment had reached fever pitch.

2. Negative noise

Throughout 2019, there have been several significant negatives that we could point to. Global debt is high and unemployment is rising. Those factors are contributing to heightened social tensions, which are seeing a rise in populist leaders, and a backlash against what many would consider ‘sensible’ economic policies.

Without doubt, as a result, there are events happening globally that are rattling markets. The trade war with the US and China is a fitting example of that – two global superpowers swinging between stalemate and vitriol has directly impacted markets and confidence.

Despite the backdrop of major events like the trade war, there are several other factors which counter the negative. For example, inflation is still low, and interest rates the world over are still low. We know that these conditions make for good investment returns. We are also seeing an unprecedent spike in technological innovation globally. Also, there is rapid growth in middle class populations throughout Asia. All of these things contribute to market opportunities, and should be considered just as much as the black spots.

3. Begin with the end in mind

The hunt for yield this year has been a hunt indeed. There is a lot of anxiety about the implications of the lower-for-longer environment on retirees.

The key question here is: what is most important to you? Is it the absolute security of your investment? In that case, you have to wear the low yields for now, and get the guarantee of a cash holding.

Many investors have realised though that they’re not getting much out of their bank deposits, and shifted their money to shares or real and unlisted assets. I sense a preparedness on the part of these investors to recognise that while share values can move around, and there are risks in markets like commercial property and infrastructure, the income flow is relatively stable.

In short, to me, the most important thing for self-funded retirees to consider in this environment is whether their priority is absolute security or steady income, and then to work backwards from that.

4. Housing hype

If 2019 taught us anything about residential property in Australia, it’s that just because housing is expensive and household debt levels are high, doesn’t mean house prices are going to crash.

The market turnaround, which kicked off around the middle of the year, also reminds us that there is strong underlying demand in our housing system. It took a few tweaks – like the election outcome and resultant confirmation that the tax system will remain unchanged for property investors and rate cuts – to spark confidence.

We continue to see an unmet underlying demand for housing in Australia. There is often talk of huge supply coming onto the market, and a jump in vacancy rates. This may be the case in some instances, but the key considerations include whether that supply is meeting demand in areas people want to live in, and if the supply is intended for everyday life (for example, it’s not a holiday home.) And most importantly, whether the supply is enough to match strong population growth.

5. Don’t discount the US

At this point in history, despite the growing global force of China, the US continues to dominate in terms of influence on global markets.

We could point to some hard examples of this, such as during the tech wreck in the early 2000s. The US went into recession at that time, and although Australia did not experience recession, our share market still got hit.

A perhaps more relatable example is in day-to-day life. I would venture a guess that even the most seasoned investors would be more in tune with the movements of the US share market on a daily basis than the Chinese share market. If the US share market has a bad day, we brace for it in Australia – it’s in the news, futures will have come down, and awareness is raised. If Chinese shares have a bad day, it might get a mention, but it’s nowhere near as big of an issue.

So, even though in relative terms the US economy has declined, this year has again proven it continues to punch above its weight.

2020 vision

For the year ahead, there’s a few themes market watchers should keep an eye on. Here’s a few for you to consider.

1. The global economic cycle

For me, the key issue next year will be the global economic cycle. As it stands, we expect that global economic growth will pick up again, in response to monetary easing that we’ve seen this year, therefore avoiding a recession at home and abroad. Should that materialise, it will likely result in decent market gains.

2. Pressure at home

In Australia, growth is sluggish, and the economy is running below its potential. This creates an argument for further policy stimulus. We have already seen the government introduce staged tax cuts from early next decade – it’s likely that these could be brought forward.

But assuming this does not occur quickly enough, we also expect to see two more cash rate cuts between now and February, bringing the official cash rate down to 0.25 per cent, which we believe will be its bottom. Any further cuts would unlikely have the desired impact, as banks have already not been passing on the recent drops in full.

The scope for extra stimulus is one of a mix of reasons we don’t foresee a recession next year. There are still measures up the government and Reserve Bank’s sleeve to prevent it.

3. The US and China trade war

The race for the US presidency next year could prompt a short-term turnaround from Trump in this long and drawn-out trade war with China.

History tells us that presidents aren’t re-elected if they let the economy slide into recession, or if unemployment spikes in the run up to the election. Trump wants to get re-elected, and he will be under pressure to put the trade war on hold for a year at least, which he could claim as a win for his leadership and hopefully, the US economy. Further, any good news Trump can announce during the presidential race represents a win for his campaign.

In addition, there is reason for China to want the trade war to settle. The Chinese economy has slowed down, and trade battles don’t help in that context. Also, there’s a risk for the Chinese government that they will be negotiating with a tougher Trump if he is re-elected, into what would be his second and final term.

In the long-term, the ongoing battle between these superpowers is unlikely to dissipate. In short, it has tell-tale signs of the so-called Thucydides Trap, in which a rising power and an incumbent power go to war (of sorts) where there is threat of displacement. This has its origins in the fear felt and acted on by Sparta during the rise of Athens. Fortunately, given both China and the US are nuclear powers a hot war is thankfully unlikely, but some sort of cold war is a high risk.

4. Local politics in the US

The US election is next year, marking the end of Donald Trump’s first term in office. He is now fighting for a second and final term, and has history on his side along with current betting market odds. Often with share markets, it’s a case of better the devil you know. A Trump re-election shouldn’t rattle share markets too much, nor should a victory from a more centrist candidate, like Joe Biden. However, if victory goes to the left, the share market would get nervous.

At the same time, there are impeachment proceedings against Trump. In public, this is amplifying significantly against Trump. Recently US speaker of the house, Nancy Pelosi, has implied Trump’s actions were worse than those of Richard Nixon, who resigned amidst the scandal of Watergate. Still, at this stage it appears unlikely that the upper house would vote to remove Trump from office (as 20 Republican senators would need to desert him), but the whole saga has the potential to rattle markets.

5. Brexit and Boris Johnson

October 31 this year was supposed to be the UK’s “do or die” Brexit Day. Instead, the UK’s Prime Minister Boris Johnson has successfully called a general election in an attempt to break the Brexit stalemate.

All major parties look to be entering the election supporting a soft Brexit or none at all, meaning the risks of a hard Brexit are diminished. Nonetheless, markets will be watching this closely in the months to come. And even if a short-term soft Brexit is agreed to, it could still return as an issue if the UK and EU fail to negotiate a long-term free trade deal by the end of a transition period

The biggest risk for the UK is if the UK leaves with no agreement in place. If this occurs, the UK will break all trade ties overnight and likely revert to World Trade Organisation rules while independent trade agreements are negotiated. This could be disastrous for the US in the short term as 46% of UK exports go to the EU (against 6% of EU exports which go to the UK).

Keep calm and carry on

I have been working in and around investment markets for 35 years now. A lot has happened over that time in Australia and overseas. A few things that come to mind include the 1987 crash, the recession Australia had to have, the Asian crisis, the tech boom/tech wreck, the mining boom, the Global Financial Crisis and the Eurozone crisis. There was also the end of the cold war, a long period of US domination and now the rise of Asia and China.

As the saying goes, the more things change, the more they stay the same. This will remain true of investment markets going into 2020. It’s important to see through the noise, hold a steady hand, and remember that the crowd can panic and get things horribly wrong.

I recently wrote about the nine most important things I’ve learned in my career, which you can read more about it here. I expect these golden rules to apply for the years to come.

Author: Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia

Source: AMP Capital 20 Jan 2020 

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

In this paper, we explore the material ESG issues we are facing globally, the key drivers for action, and the important role that the real estate industry, asset owners, customers, partners and the community have to play in driving change that delivers positive outcomes, while ensuring the assets we manage at AMP Capital continue to perform a long way into the future.

Author:  Chris Nunn, BA, LLB, MSc Head of Sustainability – Real Estate Sydney, Australia

Source: AMP Capital 16 Jan 2020

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. It should not be construed as investment advice or investment recommendations. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

https://vimeo.com/371515683

The market backdrop

Investors are resetting expectations for returns amidst continuing pressures in the economic environment as the world continues to experience global political uncertainty, sluggish economic growth and trade tensions between economic powerhouses. Interest rates are now expected to remain lower for longer than first anticipated.

In this context, investors are turning to asset classes better able to deliver attractive returns. In particular, they’re seeking out investments that exhibit defensive characteristics. There has also been significant growth in global assets under management, underpinned by the growth in the middle class of developing nations.

Market reactions and considerations

As a result, investors are continuing to direct cash flows to non-residential real estate.

There is some difficulty in this approach. Globally, investors are under-allocated – unable to place all targeted allocations to real estate – and seeking to increase these targeted allocations. However, the scarcity of this asset class means the investable universe is somewhat fixed and, unlike other asset classes such as bonds, there is no unlimited supply to meet investor demand.

For example, there are only 18 premium office buildings in Sydney, Australia and six in Melbourne, Australia. A global investor interested in the best assets in the largest markets of the Australian office sector will find the potential of that market restricted.

Patterns worldwide

This imbalance in supply and demand is driving commercial real estate asset values across the globe. While record high pricing has tempted us to call the peak of the market over the last three years, the attractiveness of the sector amidst such uncertainty and volatility means we expect the cycle to continue to extend.

Historically, real estate investment has been dominated by investment in the office and retail sectors, however as part of this search for supply we are witnessing a shift towards logistics as well as growth in demand for non-traditional sectors.

The logistics sector has benefited from a number of factors, including the growth in e-commerce, improvements to the supply chain, the increased use of robotics, and savings in transportation costs by being located close to the customer. Property is typically a smaller part of the cost structure of an online retailer, and the benefits of proximity allow substantial capacity for these businesses to pay more for well-located accommodation.

Whilst the outperformance of logistics is attractive, it is a sector that is difficult to scale up – there is only a certain amount of suitable property located in close proximity to large residential centres. Given these constraints, the next port of call for investors are non-traditional sectors that look set to be beneficiaries of global mega-trends.

Examples of this abound. The exponentially increasing global demand for data will require a vast expansion of capacity and in many cases different model of communications infrastructure, such as the proliferation of edge data centres that looks set to accompany the move to autonomous mobility. An increasingly urbanised population and declining levels of housing affordability is fuelling demand for alternatives, such as high-quality manufactured housing. A rapidly ageing population and a shrinking taxpayer base is shifting the onus for aged care provision onto the private sector.

This diversification of cash flows into real estate has led to the compression of yield spread between the more traditional sectors and these newer investable sectors.

Further investment in these sectors will broaden this diversification and more effectively disperse risk across real estate, with different factors driving performance in each sector. Under this new model of real estate investment, management expertise becomes increasingly important as opportunities open up that are outside of the traditional sectors and, in many cases, further up the risk curve.

With capitalisation rates at record lows, driving income and managing risk have become key to growth. Performance is increasingly specific to the asset concerned, opportunities are more difficult to identify to the casual investor, and the management of environmental, social and governance (ESG) considerations are paramount to achieving sustainable value.

Real estate is a sector exposed to considerable regulatory influence, entailing both upside and downside risk. The consideration of ESG factors, especially in the current political climate, is unavoidable, and should be ingrained in the active management of the asset, at every point of the buy-hold-develop-sell cycle.

As the world grapples with uncertain prospects across a number of other asset classes, the outlook for non-residential real estate remains distinctly positive, with sound property market fundamentals still at play, and investors continuing to be attracted to the defensive characteristics of this asset class.

Author: Claire Talbot, Fund Manager – Real Estate Sydney, Australia

Source: AMP Capital 20 Jan 2020

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

https://vimeo.com/377459230

To the relief of homeowners, the Australian market has performed exceptionally in the second half of 2019. This much-anticipated change in direction for the housing industry has set the tone for the year ahead.

The road so far

In May the Coalition government unexpectedly won the federal election, which removed some of the risks around potential changes to property taxation; then the RBA resumed a program of monetary easing; and finally, the Australian Prudential Regulation Authority (APRA) announced it had reduced the interest rate used for bank serviceability when assessing household mortgages.

In combination, these occurrences triggered a recovery in Australian house prices from the middle of the year, and they’ve strengthened further over the past couple of months. The increase was a welcome change after consecutive month-on-month declines for nearly two years.

In looking at recent trends in the housing market, it does appear as if Sydney and Melbourne property prices will likely rise by about 10-15% over the next six to twelve months (which is heavily predicated on the likelihood that RBA will continue to cut interest rates).

Therefore, there are three key concepts that should guide our thinking around the housing market in the near-term.

What could be on the cards?

First, we anticipate the RBA will announce in early 2020 another two interest rate cuts from the current cash rate of 0.75%. There’s also a risk that the RBA will begin quantitative easing, which would have the likely effect of reducing bond yields and the level of borrowing over the medium to long-term. The question of whether and in what manner the RBA might proceed with QE will have a large bearing on home prices over the new year.

Second, we need to keep an eye on credit data to obtain an overall assessment of borrowing, less the repayments that households are making on their mortgages. To date, we’ve noticed the credit data upswing hasn’t been as strong as the increase in lending or in home values. The reason for this is a lot of households are still keeping up their repayments, despite recent interest rate cuts.

As a result of this, households are deleveraging, which is positive for financial stability. If, on the other hand, we detect that credit data is picking up quite significantly (particularly for investors) it may heighten the risk that APRA responds by introducing macroprudential tightening tools.

And third, we need to keep in mind the dynamics between housing supply and demand. Over the past six to twelve months building approvals and new home construction have fallen significantly. The drop was largely anticipated, due to the considerable run-up in housing construction and overall increase in market housing supply since 2014, but the recent fall presents a substantial risk for near-term supply.

Thanks in no small part to steady population growth over the years we still have a very strong demand for housing in Australia. However, if supply continues to trickle so slowly into the market, or building approvals remain sluggish, we risk a period of undersupply in Australian housing and home prices will likely continue to rise as a result.

Taking all of these factors into account, the overall picture for the Australian housing market over the next one to two years is that after initial and significant gains in Sydney and Melbourne, we should see prices start to stabilise – running at about 5% yearly growth over the near-term.

Author: Diana Mousina, Economist – Investment Strategy & Dynamic Markets, Sydney Australia

Source: AMP Capital 18 Dec 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

https://vimeo.com/377480434

Determining the best option for income investment can be a challenging task, and retirees in particular have a specific set of needs that set them apart from other investors.

A decade ago, generating an income in excess of six per cent was very achievable, and could be diversified across a number of relatively low-risk asset classes such as long-term bonds, term deposits and residential property.

Today, however, it’s a different story, with fixed income and annuities returning record-low yields. High income options are now very limited, and investors must search hard and take on a level of additional risk in order to secure sufficient and reliable yields. In this environment, equities look to be the best way forward.

Not only are equities able to generate strong cash flows, in many cases they also provide franking credits. Having escaped regulatory risk in the May federal election, franking credits have become a very important and stable driver of income returns in a retiree investor’s portfolio.

Alongside stable legislation there has also been a record number of franking credits dispensed in the Australian share market. Companies are delivering record amounts of franking credits through dividends, a massive number of off-market buybacks and increased special dividends. The record was set in 2018 and the second half of 2019 saw a strong run rate, suggesting promise for this profitable trend to continue.

We believe that performance in equities will only increase over the short term . Returns from franking credits alone are currently almost equivalent to returns across cash, bonds and credit, and are higher than term deposits, fixed income or annuities.

Overall, taking advantage of franked dividends and franking from buybacks through Australian equities looks set to be an increasingly valuable part of a retiree’s ability to drive income from their portfolio over the next few years.  

Author: Dermot Ryan, Sydney, Australia

Source: AMP Capital 15 Jan 2020

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.