During 2019, share markets around the world shrugged off concerns about trade wars and slowing global growth and ended up performing very strongly. Fixed interest markets, which generally offer more subdued returns, experienced a good year too.
It was a year in which many central banks around the world cut interest rates, including the Reserve Bank of Australia (RBA), the US Federal Reserve and the European Central Bank. This global monetary easing buoyed both equity markets and fixed interest markets.
The RBA lowered the cash rate by 75 basis points to an all-time low of 0.75% in 2019 to help stimulate the Australian economy, and they are likely to lower interest rates again in the next six months. GDP growth in Australia has been slow and there has been a considerable slowdown in household consumption lately due to a protracted period of weak income growth and high household debt. While a recession for the Australian economy doesn’t appear to be imminent, neither does a sharp pickup in growth.
Given that risks remain in the Australian economy, this poses uncertainties about the sustainability of the rally in the Australian share market. Looking forward, the best opportunities for share investors are more likely to be found offshore rather than onshore. While share markets in the U.S. look expensive, the shares in Europe, Asia and other emerging market economies seem to offer good value.
The Australian dollar is also expected to continue to depreciate over the coming year; this can be a nice source of additional returns for portfolios that are unhedged. A lower Australian dollar automatically increases the value (in Australian dollar terms) of investments held offshore.
For investors, it is important to get the balance right between seeking good returns and managing risks. Incorporating some risk management strategies in portfolios is a little like having some insurance in place in case things go wrong. The aim is not to try to eliminate volatility - investors want exposure to markets when they are rallying strongly - but to lessen the downside risk should it eventuate.
A new year begins
More recently the coronavirus and bushfires have affected markets both home and abroad. Bond yields fell in January, initially due to escalating tensions between US and Iran and then spurred on further by the outbreak of the coronavirus as investors moved to safe-haven assets, pushing bond prices up. The Australian share market rallied 4.7% in January but gains were pared following the coronavirus outbreak.
As China is Australia’s largest trading partner, negative repercussions are expected as tourism, education and commodity exports are temporarily disrupted. Likewise international share prices, particularly Asian shares, tumbled thanks to coronavirus. Overall the Australian dollar was weighed down by negative sentiment towards coronavirus including the knock on effect of lower iron ore prices, along with a widening differential between Australian and US interest rates. Australian economic growth has been negatively disrupted due to the bushfires but should benefit from the rebuilding process in the medium term.