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Cuffelinks Newsletter Edition 284

  •   14 December 2018

The outlook for markets in 2019

In the six years I have been writing these introductions, 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, 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."

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 last week's 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 summer holidays is a time to think about portfolio risk, and we have three market outlooks. Bill Evans describes the domestic slowdown and higher US rates, Lee Mickelburough and Jay Sivapalan look at prospects for Australian equities and bonds, and in the White Paper, Shane Oliver checks 2019 prospects.

Elsewhere in this cracking edition ... 

James Swanson gives some timeless advice as he reflects on 40 years of investing in global markets, while Roger Montgomery warns we have not fully appreciated the changes occurring in media and broadcasting. It really is a paradigm shift.

Many SMSF trustees are faced with managing their superannuation in both pension and accumulation modes for the first time this year, and Melanie Dunn shows what to watch for. Darren Beesley also describes ways in which managing portfolios after retirement needs a different mindset.

Each year for the past six years, Legg Mason has conducted a major Global Investor Survey, including an Australian component, and the full report reveals how investors are thinking about the future. And in the ultimate future, David Williams looks at non-financial longevity issues, including the massive range of outcomes of how long a 65-year-old can expect to live which makes retirement planning so difficult.

In 'Additional features' below, the BetaShares ETF Review shows how investor demand is changing, with the top flows into global and bond funds, a complete contrast to the past. 

Graham Hand, Managing Editor (who has an economics degree but is reluctant to use it)


For a PDF version of this week’s newsletter articles, click here.




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