Can ASX hit 7000 in 2020? Macro outlook for the new year

2019 was a bumper year on the Australian Stock Exchange. The S&P/ASX 200 saw a double-digit return of 18.4%, and analysts are already predicting 2020 will be the year the index breaks through the 7000-point ceiling for the first time. Markets around the globe performed unusually well, but according to new data published by a major group, only the London Stock Exchange and NASDAQ outperformed the ASX in terms of capital gains.

This huge surge in prices has been driven by easing monetary conditions and buoyed investor sentiment rather than revenue growth, and price to earnings multiples have consequently gone through the roof. As a result, leading analysts and economists are wary of the shocks to the market 2020 might bring.

The nature of Australia as a small, open economy makes it vulnerable to the political and economic turmoil of international markets. We’ve selected a few factors that could challenge the stability and upward momentum of Australian share prices in the coming year.

Brexit

The UK is expected to finally exit the EU this month… probably? After voting to leave in 2016, with a deadline originally set for 29 March 2019, and another deadline passed on October 31^st, you’d be forgiven for questioning whether MPs can truly secure a deal this time. However, after the December election gave the Tories a comfortable majority, it finally feels certain that something will happen, for better or worse.

It’s difficult to reliably predict anything when it comes to Brexit when even the date has proven so elusive; the only thing that seems certain is uncertainty. New trade deals and borders are likely to leave businesses guessing up until the last minute. The importance of London as a financial hub will mean both predictions before, and fallout after Brexit are likely to shake currencies and stock markets around the world.

However, in the event that Australia negotiates a new, favourable trade deal, which is not unlikely given historical ties between the two countries, things make shake out better in Australia than in other countries. For now, it’s a waiting game.

US Presidential Election

Election years are generally turbulent for stock markets. Uncertainty is high and businesses often delay investments until they can be sure of what economic conditions will prevail when the last ballot has been counted. This year promises its own special challenges, as it is hard to remember a time when the field of candidates occupied a broader political spectrum. The Republicans under Donald Trump have swung hard to the populist right, while popular Democrat candidates Bernie Sanders and Elizabeth Warren represent the radical left of the party. Both outcomes would have their associated risks for financial markets, domestically and abroad. Major Wall Street fund managers are suggesting that having Senator Warren in the White House would be bad for business. Another four years under President Trump’s aggressive trade policies could be just as detrimental. Australia tends to move with US markets rather than against them, so our fortunes are more or less tied with theirs.

Iranian tensions

The January 3^rd 2020 assassination of Iranian military commander Qasem Soleimani by US forces has escalated tensions in the gulf to the highest level in years. Volatility in global markets has already been observed, after the price of crude oil topped $70 a barrel for the first time in four months, and gold hit a seven year high.

It would be nice to write this one off as recency bias, but Iran's Supreme Leader Ayatollah Ali Khamenei’s promise of “severe revenge” against those responsible for the attack has sent shivers around the globe, as has Iran’s withdrawal from its nuclear agreements. Though the ASX rallied on Friday while other indices around the world faltered, a serious shock to the global supply of oil will likely threaten growth in the ASX.

US trade battles

Like the other factors we’ve listed so far, this one is likely to affect Australia’s stock market indirectly, rather than directly. The escalation of the trade-war between the US and China has shaken economic confidence globally and is believed to have been a major contributor in the global slowdown we saw in 2019. They are, after all, the two largest economies in the world, so any limitation on US and Chinese productivity and growth (as is the expected effect of tariffs) has far-reaching flow-on effects. Though Trump delayed the latest round of tariffs that were expected to drop in December, a final agreement has not yet been reached, and the trade war could yet wage on in any direction.

Also, given that trade tariffs seem to have become the weapon of choice in Trump’s toolbox of international diplomacy, and that American allies such as France, Brazil and Argentina were the latest to be targeted, the odds of Australia being next are far from zero. This would suddenly bring the trade-war out of the “indirect” pile of macro influences.

RBA rate cut

Leading Australian economists are predicting at least one rate cut from the RBA in the coming year. This will bring the historically low 0.75% cash rate to an even lower 0.5%, though there is definitely scope for it to fall even lower. Low interest rates generally stimulate the stock market, as credit becomes cheaper, and bank deposits and similar asset classes offer lower returns.

However, while the RBA was able to lower the cash rate three times in 2019 in response to low inflation and a stagnant economy, that breathing space is growing narrower as we creep closer to 0%, and investors cannot bank on continual monetary easing. If the economy continues to slow as it did last year (the last round of national data from the September quarter recorded yearly growth of only 1.7%) another rate cut is unlikely to be enough to boost the ASX on its own, though it might help with the broader recovery.

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