October is well known for its share market volatility and even though the decline was not surprising the continued volatility has lasted longer than we expected for this time of the year. Since the August high the decline in the Australian All Ordinary Index has been approximately 12%. Shares may still have more downside however our view is that this present decline is another correction and periodic corrections of 5-15% are healthy and normal. For example, the Australian share market had a 10% pullback in 2012, an 11% fall in 2013, an 8% fall in 2014, a 20% fall between April 2015 and February 2016 and a 7% fall earlier this year.
Global issues - the various political issues (Brexit and tensions in the Eurozone, the trade war between China & US and other related issues) and interest rate rise concerns in the US - have been the main driver for the October to December share market decline. Tomorrow we will find out if the US Reserve raises rates again which may determine the direction of the share market from now to post Christmas.
Australia continues to have its own headwinds driven by low wage growth and declining credit growth combined with extremely high household debt. We believe 2019 is likely to be a more ‘interesting’ year for the Australian economy due to the downturn in housing, uncertainty with the global outlook and the fact it is an election year. All these will add to uncertainty which echoes into the share market bringing renewed volatility. It may be a premature prediction however current data seems to suggest that late 2019 may even deliver a rate cut!
Many economic updates predict the Sydney and Melbourne house prices will likely fall another 10% in 2019 (a total fall of 20% from highs) due to poor affordability, tight credit conditions, a collapse in foreign demand due to regulation changes, borrowers switching from interest only to principle and interest loans, fears by investors with the potential change in negative gearing and capital gain tax. Further decline and overall pressure on the Australian property market will have a significant negative economic impact. It is worth noting that most housing and banking crises in history have been preceded by large and sustained periods of credit growth. The September quarter GDP growth was just 0.3% quarter on quarter or 2.8% year on year and was well below expectations. It seems to suggest that consumer confidence is not as high as believed and spending is on the decline.
At this stage we however don’t expect a recession due to low interest rates and stable (but declining) GDP growth of 2.5 to 3%. Should this change then the potential for a deeper slump in property prices could be the catalyst to further impede Australian markets. It is a significant risk however present data seems to suggest that this is not the case. Against the backdrop of falling house prices, tight credit conditions and constrained growth, we may even see the next move by the RBA being a rate cut in the late half of 2019. Rate cuts won’t be aimed at reinflating the property market but supporting households with a mortgage to offset the negative wealth impact on spending. We predict that banks will likely have no choice to pass the cuts on given the bad publicity not passing them on will generate.
With continued global issues and growth concerns in the US, combined with our own growth concerns at home, the next 12-18 months will potentially be tough for investors, especially for those invested in property. We still expect global shares to remain outperformers for capital growth but Australian shares are still great for income. We expect bank deposit rates to remain poor and hence retreating from income producing shares in attempt to ‘time the market’ has its own risks. Most share portfolios return an income yield of 4-6% after franking credits and therefore the real risk for investors is not a volatile market itself, it is abandoning long-term financial goals purely because of short term capital concerns. As many know, we have been focusing portfolios on income producing assets for some time.
Like last year, and the year before, significant events both here and abroad will continue to impact markets. Overall returns for the 2018 calendar year have been very constrained (nil to low single digit returns) for most portfolios due to the most recent decline. We predict mid digit returns to be the case for the next 12-24 months however this will depend on wage and credit availability.
It’s worth stating, that regardless of what’s happening here or abroad, we will continue to closely monitor the markets, review potential risks, and consider potential changes to economic markets, growth industries and legislation to provide what is best for our clients. Where necessary, we will continue to recommend changes to both investments and strategies to maximise your situation.
For those with concerns then early to mid next year will be a good time to review portfolios. Changing your asset allocation as a reaction to short term market fluctuations is an important decision and many factors should be considered including your age, life stage and risk appetite. You should seek advice before changing your long term investment strategy – so please give us a call.
From the team at Active Financial Services, please have a Merry Christmas and a safe New Year! Our office will closed from Monday the 24th of December to Friday the 11th of January, We will be fresh and ready to assist you again from the 14th of January however please do not hesitate to email your adviser should there be an urgent matter during this time.