Five Australian themes for 2020
|The ASX 200 equity index rose 18.4% YoY in 2019, driven by a strong global rally, the surprise Morrison Federal Government re-election and 75bps of Reserve Bank of Australia (RBA) rate cuts. The rally occurred despite consensus earnings estimates falling 2.9% YoY, lifting the ASX 200 forward PE ratio to 18.2x; a level only exceeded briefly in the equity bubble of 1999-2000.
Looking into 2020, we introduce five investment themes:
Theme #1: More muddle-through growth: Indicators suggest sluggish 1.7% YoY GDP growth in 3Q19 continued in 4Q19. Looking ahead, the headwinds appear to outweigh the tailwinds, keeping growth sluggish and earnings under pressure.
Theme #2: A limited policy response to prove inadequate: We expect the RBA to cut rates another 50bps to just 0.25% in 1H20 but, in our view, this will do little for growth. Being more than two years out from an election, the Federal Government will likely focus on a return to surplus rather than tax cuts.
Theme # 3: The home price recovery to peter out: Reflecting little rate-cut pass-through, poor affordability, record debt, bubble valuations and oversupply.
Theme #4: The search for yield: Cash at zero and bonds around 1% will drive funds into risky assets. Investors need to be selective given high valuations.
Theme #5: Renewed Australian dollar downside: Reflecting record negative rate spreads, anaemic relative growth and deteriorating commodity prices.
Investment implications: Australia is risky, given bubble-like home and equity valuations at near-zero rates. We are underweight Australia, seeing better opportunities in global markets. Within the Australian market, we like ‘global leaders’, and are overweight energy, materials and industrials.
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