Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Mixed conditions across Aussie equities, credit and property

Glenn Freeman  |  28 Nov 2018Text size  Decrease  Increase  |  
Email to Friend

Bear market

A fierce downturn or 'grizzly bear' market is unlikely, says AMP's Shane Oliver

Australian companies remain over-exposed to global macro-economic threats, including US market movements and political uncertainty around US-China trade tariffs, according to the November 2018 Australian economic update from Morningstar.

Even as the global economy should continue extended period of post-GFC expansion into 2019, "there are risks, notably around trade wars and potential mistakes from accidentally overtightening monetary policy, which could derail the outlook," says manager research analyst and report author, Peter Gee.

He notes that even in the context of an "upbeat take" from the Reserve Bank of Australia in its latest business activity forecast for 2019, this may not translate into strong corporate outcomes.

Gummy and grizzly bears

AMP chief economist Shane Oliver has also assessed the case both for and against a "double bottom" low in the local share market, or for their potential to climb again in the shorter term.

"The bottom line is that, I don’t know whether it will remain just a correction, or maybe slide deeper into what I like to call a 'gummy bear' market – where markets have a 20 per dent top-to-bottom fall, but are up a year after the initial 20 per cent decline.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

"But I remain of the view it’s unlikely we are sliding into a deep or 'grizzly bear' market, as the conditions are not in place for recession in the US, globally or Australia," he writes in a recent market update.

Lower returns ahead from fixed income

Within the domestic credit market, the RBA's 9 November monetary policy statement pointed to continued improvement in unemployment, which if it continues, could lead to higher interest rates, "though not in the near term".

Gee suggests this might mean a 25 basis point increase in either late 2019 or or early 2020 - meaning weaker returns from short-term fixed income investments until then.

Higher inflation will also likely increase bond yields, which is also supported by the likely rise in US bond yields.

"Rising yields and the associated capital losses are likely to make for low overall returns from fixed interest over the coming year," Gee says.

The Amazon effect

"Conditions are mixed across the subsectors of the A-REIT universe. Industrial remains in the strongest position, with e-commerce being an important driver," says Gee.

The entrance of Amazon to the market, in particular, is a considerable fillip for the sector, along with other e-commerce retailers, which are singled out as some of the "largest takers of industrial space over the last few years," he says, citing a report from Colliers.

"Overall, the mixed conditions suggest the A-REITs do not currently stand out from the overall equity market.

"The sector may get some support as a defensive option if there is further significant volatility, but otherwise performance much in line with the wider market looks a plausible prospect," Gee says.

'Middle of the pack' performance

Within Australian equities specifically, Morningstar concurs with the view held by many commentators: that corporations will continue to deliver "middle of the pack" performance.

"The labour market remains healthy, growth is solid, but that wage and price pressure remains subdued in the economy more broadly. But there are also more downbeat perspectives," he says.

A Commonwealth Bank monthly survey of manufacturing and service economy businesses tends toward the weak side, he says, indicating "the joint weakest rate of private sector output in the two-and-a-half-year survey history".

S&P/ASX 200 companies in were only 5 per cent in the first half of fiscal 2018, relative to the same period 2017, according to the latest RBA quarterly monetary policy statement.

This slow growth is attributed largely to the financial and resources sectors – and more of the same is likely given the mixed views on the business outlook. Though Morningstar notes that equity performance could surprise on the upside if the RBA's more upbeat scenario plays out.

More from Morningstar

The US China trade war is evolving to a new Cold War

3 top rated ETFs for your portfolio

Make better investment decisions with Morningstar Premium | Free 4-week trial

 

 

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend