What lies ahead for ASX, global markets in 2020 - Part 2

-- | 19/12/2019

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Glenn Freeman: Looking through the latest Your Money Weekly, a subhead there was "Australia stuck in a rut". And just one of the things that stands out to me is, it looks like there's this tension between – you've got the central bank calling for business and the government to stimulate, to shift from into spending and investing and growing. Whereas business – they're just sitting back going, well, the global picture is not looking great, we'll just hold off, thanks.

Peter Warnes: Yeah. Well, again, forces are at play that aren't particularly positive for the Australian economy. And the uncertainty around trade is influencing what the business community is saying, why should I put money on the table when I'm not certain about the outcome, I can't forecast anything. And I'm not going to move my hurdle rate despite what the Reserve Bank is trying to say, lower interest rates, since they lower the hurdle rate. Well, no, that's when you walk into trouble. So, the business investment is only a small contributor to GDP. The household consumption, which is 65 per cent of GDP, they have decided that we're going cautious as well. And they are now questioning, if you like, the Reserve Bank. They're saying, why are you cutting interest rates? Not as it's a cause for celebration because my repayments have fallen. They are saying, hang on a second. Why are you doing it? Well, they are doing it because the economy is stumbling. And globally, that's the situation. As I say, my headline is that that the central banks are in a bind global. Because all they're doing now is through accommodative monetary policy and QE, in other words, buying back assets and pushing liquidity into the system, all they're doing is – it's a painkiller, while I try to figure out where's the cure. Look at the US, for example. If you've got unemployment at 3.5 per cent and robust jobs market, how does that tie up with way below trend GDP growth?

Freeman: Yeah.

Warnes: I mean, when you've got basically no capacity left in your employment sector, everything should be booming.

Freeman: Yeah.

Warnes: Well, it ain't.

Freeman: Yeah. And yet the RBA is trying to do the same thing it's always done but it's just not – the needle is not moving.

Warnes: Well, they can't move it because they can't be the heavy lifting. They've done the heavy lifting. There's nothing left in their arsenal. The Reserve Bank has got three more bullets, right, before they go to zero. And they said, they don't want to go zero. They'll probably go to 0.25 and then then start buying bonds. Well, I still don't think it will work. And then, Scott Morrison is saying, well, we'll throw another 5 billion of infrastructure and we'll fast track. There's only a few companies that can actually perform this infrastructure. And they've got a very, very big pipeline already. So, stuffing the pipeline and prioritizing things won't get things happening any quicker. So, the fiscal policy has to come from increasing household disposable income. And how do you do that? You cut the tax rate. That's what's got to happen.

Freeman: In the rest of the report, the equity analysts from Morningstar have each given an outlook on various sector and some of the companies that they cover. So, without going into too much micro detail what are some of the things that really stand out for you that people can find in this report, this forecast 2020?

Warnes: Well, Glenn, don't forget we are also on the edge of a record level in our market. In fact, our stock coverage suggests that the market is slightly overvalued. The average price to fair value across our 200-odd stocks is 109. So, it's a 9 per cent premium. And if you do the market weighted average, it's 114. So, it's a 14 per cent premium. So, we're saying that, overall, the market is a bit pricey.

Look, the banking sector has had – and I know it's horrible – because probably for a couple of years. Well, not one year; it's been several years. I'm not saying there's great value there. We're suggesting Westpac and ANZ are looking a little underpriced. But don't forget, the bankers are the bankers to the economy. If the economy can recover and what have you, the bankers will do quite well. But again, until we get credit growth, in other words, total credit growth, bottoming and turning up, they're going to be under some pressure. They're trying to grow their loan book is going to be under pressure because total credit is only at 3 per cent now. That's not significant. And that's because the growth in housing credit is significantly under pressure. I mean, it's halved from the year-end January 2018 at 6 per cent. Now, it's less than 3 per cent. So, you're going to get…

Freeman: We keep hearing about lending picking up though?

Warnes: Well, you've got to get those – that's in spots and what have you. And the house prices on the east coast and what have you, that's been more supply driven or lack of supply, rather than we're off to the races again. I mean, we've had a lot of expats – more than a few expats coming out of Hong Kong, and they've hit the market here and what have you and the supply has come off. So, those prices probably are a little bit – they are unsustainable. The rate of growth is unsustainable. And until we get some certainty around trade, business investment and more money in the households' pockets – I mean, consumption drives investment. Investment has never driven consumption. And (indiscernible) have got to understand that. But at this point in time, they don't.

Freeman: Right. Thanks very much for your time today, Peter.

Warnes: It's a pleasure, Glenn. And I'd like to wish all the subscribers a safe and peaceful Christmas and hopefully, a very, very happy and prosperous 2020. And if you've got any spare coin, I'd suggest that you can buy a bow.

This report appeared on www.morningstar.com.au 2022 Morningstar Australasia Pty Limited

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