The Australian reporting season was disappointing, with significantly more misses than beats and a large number of downgrades to forecasts for FY19 and FY20. There was some offset from a number of special dividends, although dividend forecasts were cut in a range of sectors.
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After a strong rebound since December share markets are at risk of a short-term pull back. However, despite this we see this year as being a decent year for share market returns.
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A new year, a new direction. Markets overcame their concerns from 2018 and moved in a positive direction in January.
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One of the critical issues for 2019 is the extent to which China steps back from its reform agenda and allows a re-acceleration of credit. January’s record credit data suggests this might now be occurring.
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The housing cycle and house prices always incite high interest in Australia. Until recently it was all about surging prices and poor affordability – particularly in Sydney and Melbourne. Over the last year it’s turned into how far prices will fall and what’s the impact on the economy.
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Australian equity valuations improved during the year-end sell-off but they did not become compelling. The forward price to earnings ratio (PE) briefly dipped below historical averages, however, the positive start to the year has pushed the market back above this metric.
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December failed to produce the much hoped for Santa rally and was yet another challenging month in what turned out to be a difficult year for investors.
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2019 is likely to be an interesting year for the Australian economy. Some of the big drags of recent years are receding but housing is turning down, uncertainty is high around the global outlook and it’s an election year, which will add to uncertainty.
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As we move toward the festive season respite for investors may be coming given developments on trade with China, as discussed below, combining with some clarification from US Federal Reserve Chair Jerome Powell where he indicated that rates are “just below the broad range of estimates of the level that would be neutral for the economy.”
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As 2018 comes to a close the political noise is deafening on a range of familiar issues. Fortunately, many of these event risks should pass early in 2019 and leave no permanent scars.
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