Welcoming the New Decade- Challenges to look at for 2020 Stock Investments

2019 witnessed major ups and down in the global and Australian economy. With risks still tilted to the downside and the global economy remaining reasonable, here we welcome 2020- the year when Australia’s economic growth is expected to increase further, especially from mid-2020.

2019 in a Nutshell

For the equity share market, 2019 was subjected to a lot of micro and macro-economic events. Investor sentiment was built both positive and negative, in reaction to these events. Let us begin by screening through a few highlights from the year-

• All-time highs, an inverted yield curve and a feared recession
• A manufacturing slowdown and technology disputes affecting international trade flows
• A protracted trade war of the US and China and an impeachment inquiry in Washington
• Businesses were noticeably scaling back spending plans because of the uncertainty
• Low unemployment rates in most advanced economies and wages growth picked up
• Inflation remained low
• Interest rates have been very low around the world
• Central banks have eased monetary policy over recent months
• Financial market sentiment has continued to improve
• Long-term government bond yields are around record lows in many countries
• Borrowing rates for both businesses and households are at historically low levels
• The Australian dollar is at the lower end of its range over recent times

2020- The Outlook

American global investment management corporation, BlackRock, in one of its research reports for the 2020 global outlook stated that growth should edge higher in 2020, limiting recession risks. Economic fundamentals are likely to drive markets in 2020.

A silver lining seems to appear in global trade relations, with less risk from trade tensions and less scope for monetary easing surprises or fiscal stimulus. Moreover, carrying forward the trend of 2019, central banks are expected to maintain the easy policies, with interest rates and bond yields near their lows.

Closer to home in Australia:

• GDP growth is expected to be around 2¾ per cent over 2019 and 2020
• Underlying inflation is expected to pick up to 2 per cent by early 2020
• Inflation is likely to increase a little further by mid-2021
• Growth in major trading partners is expected to be around 3¾ per cent in 2019 and 2020

Stock Investment Challenges in 2020

Few market experts suggest that in the start of this new decade, Australia’s annual GDP will be over $2 trillion, and the country will mark 29 years with no recession. Moreover, the Australian population will get very close to 26 million people.

Let’s look at the investing side now- the economy will be a dominant issue for policy makers and interest rates will continue to drive investing sentiments and investment returns. So, what are the probable challenges that might affect the Australian share market? Let’s find out-

Property Stocks

The downturn of Australian property remained to be a major discussion in 2019 and is expected to be carried forward in 2020. However, according to property data expert, CoreLogic, the dwelling values increased by 1.1% over December 2019 and by 4% over the quarter to conclude 2019 on a positive note. Upholding this metric, the Australian Bureau of Statistics (RBA) reported a 2.4% rise in residential property prices across the combined capital cities over the September quarter.

But what investors should be wary about in 2020 is the possibility that rising consumer confidence levels, along with improved housing affordability, might result in higher sales volumes than seen in the last few years. This might consequently release in market competition while a sustained uplift will still take time (even though the worst of the property market downturn is behind the country and stable conditions are knocking).

Experts believe that even with slight progresses on the property front, affordability remains a challenge.

Economic Conditions

Micro-economic factors have a deep affect on the stock market. Even when there is likely to be a GDP growth from the current 1.7% annual rate to around 2.5% by the middle of 2020 before hitting 3%, the labour market is set to remain problematic in the first half of the year, with annual employment growth set to weaken. Moreover, hindered by a soft Australian economy, inflation will remain low for the bulk of the year.

Another challenge is- interest rates. Experts opine that interest rates are going down hint on poor economic growth and indebtedness.

On the macro-economic front, the US presidential election is likely to play a major role in international trade relations as the prospect of a change in President impacts investor sentiment.

Domestic Uncertainties

In the statement issued in the last meeting of the Reserve Bank of Australia (RBA) on 3 December, where the Board decided to leave the cash rate unchanged at 0.75% at the back of a reasonable global and domestic outlook, Governor Philip Lowe discussed a few domestic uncertainties that might impact Australia in the days to come. These centre around the outlook for consumption, with the sustained period of slight increases in household disposable income which continue to weigh on consumer spending. Other uncertainties centre around effects of the drought and the evolution of the housing construction cycle.

Australian Dollar

The Australian dollar is on a fresh multi-month high, thanks to the de-escalation in trade tensions between the United States and China and easier monetary policy settings. However, this poses challenges for the Central Bank, RBA, to grow the domestic economy sufficiently to lower unemployment, boost wage growth and have underlying inflation within the 2-3% annual target.

With a new year bringing in more options for businesses and investors alike, it will be interesting to watch the year unfold in the Australian share market. The Federal Government along with the Central Bank and other regulatory authorities are committed to overall growth, and the stock exchange is extremely vulnerable to any decisions and changes taken in the economy.

Let us await to witness the action on the ASX!

Disclaimer

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