Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 285

2019 is time for investment caution

(This is an expanded version of the Cuffelinks newsletter introduction of 14 December 2018).

In the six years I have been writing the weekly introductions in our newsletter, I have been reluctant to make macro forecasts. There are so many factors at play that predictions become an unsatisfactory 'on the other hand' exercise. Sound reasoning can be overtaken by a late-night tweet from an egotistical and unpredictable leader.

Former Leader of the Federal Opposition and prominent economist (and one of my tutors at university in 1983!), Dr. John Hewson, told an EY client function at the end of November 2018:

"Today, it's harder to predict how things will unfold in the world than at any time in the last 40+ years. It is a riskier environment than I can ever remember. A lot of the relationships economists took for granted no longer seem to apply."

In previously unreported comments, Dr Hewson was worried about Donald Trump's capacity to govern the world's largest economy. He said:

"Most of the global forecasts for the US economy show a slowing through 2019. I am personally very pessimistic about 2020. I think the US economy could be sliding into recession in 2020, and the damage that will be done to Trump in 2019 as an individual and as a political leader will make 2020 a very tough presidential year if the Democrats can get themselves organised. There will be a lot of volatility coming out of that." 

Set a portfolio for the long run, but watch for market extremes

My investing philosophy is to construct portfolios based on risk appetite and goals, which enables you to sleep comfortably and not panic if the stock market falls. Tactical asset allocation based on market expectations can lead to constant portfolio switching at the wrong time with higher costs.

Contrary to my instincts to minimise tampering, this is a time for greater caution in portfolios. Central banks have spent the best part of a decade stimulating economies and expanding their balance sheets, including buying US$18 trillion of government bonds in QE. This money found its way into other asset classes and inflated prices. A major deceleration is now underway, with their balance sheets flat or falling. The US Fed wants to raise rates further, corporate credit spreads are widening and geopolitical risks are high.

In Australia, risks are heightened by the Royal Commission-induced crackdown on business and residential property lending, especially for investing. Anecdotal evidence from mortgage brokers writing to Cuffelinks suggests it's worse than yet seen in official data. The OECD issued a report this week showing Australian household debt rising rapidly, even at a time of record low interest rates. Falling property prices and the transition from interest-only loans will contract the local economy, and any increase in unemployment will make high household debt levels problematic.

Household debt as a % of net household disposable income

Source: OECD Economic Survey of Australia 2018.

There has been much debate about a recent speech by Guy Debelle, Deputy Governor of the Reserve Bank. The controversial statement was this:

"The Reserve Bank has repeatedly said that our expectation is that the next move in monetary policy is more likely up than down, though it is some way off. Should that turn out not to be the case, there is scope for further reductions in the policy rate. It is the level of interest rates that matters and they can still move lower ... QE is a policy option in Australia, should it be required."

Are the possibility of Australian QE and rate falls a warning? The fact that the Reserve Bank this week relaxed quantitative restrictions on banks lending interest-only loans shows how much they are concerned about the slowdown in housing and tighter lending conditions.

The summer holidays is a time to think about portfolio risk, and three articles examine the market outlook.


Graham Hand is Managing Editor of Cuffelinks.



Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Latest Updates


'It’s your money' schemes transfer super from young to old

Policy proposals allow young people to access their super for a home bought from older people who put the money back into super. It helps some first buyers into a home earlier but it may push up prices.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.


Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.


Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.


Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. 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) 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). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.