4 factors for Australian traders to consider for 2019

Another busy week for markets and once again it has been offshore geopolitical events that have dominated the news. Major stories have included protests in France, the UK Prime Minister, Theresa May facing an embarrassing defeat, delaying the meaningful vote on Brexit and then surviving a vote of confidence in her leadership. Elsewhere, news that the Italian budget deficit target for 2019 had been lowered from 2.4% of GDP to 2.04% was well received. All European events were able to keep U.S.-China trade tensions off the front page of the business papers this week.

With a new year fast approaching, it is perhaps time to consider four key issues facing investors closer to home and their potential implications on markets.

Housing:

It’s impossible to open a newspaper currently without reading a story about falling housing prices. Official data reports falls of approximately 10% in Sydney since the peak of the housing boom at the end of 2017. However, real estate agents in some areas are reporting falls of 20% or more. While it pays to keep in mind that prices are still significantly higher than they were 5 years ago, tighter lending standards, and an already high level of household indebtedness, suggests 2019 will see further declines in property prices. At this stage, the decline appears orderly, however there is a risk of price declines becoming more disorderly heightened by the next Federal election (more on that shortly) and reduced immigration numbers.

Growth:

Recent GDP data showed growth in the Australian economy slowed to 2.8% in the September quarter, just weeks after the RBA forecast growth of 3.5% for 2018 and 2019. Weakness was noticeable in two areas. The first was soft consumer spending, driven by weak income growth. The second area of weakness was in new dwelling construction which reflects the downturn in building approvals as tighter lending standards, along with lower property prices start to have an impact.

The negative wealth effect in 2018, caused by lower property prices and falling share markets, combined with record low wage growth and high household debt, suggests the lower growth trajectory seen during Q3 of 2018 is likely to continue in 2019, albeit with offset from strong Government infrastructure spending.  

Jobs market

The jobs market remains one of the positive lights for 2019. In October, the Labour force report showed a 33k gain in jobs, taking to 86k the number of new jobs created in the three months to October. This ensured the unemployment rate remained at its lowest level since 2012 at 5%. Employment data is consistent with a labour market in good shape, of ongoing job creation and is supportive of further declines in the unemployment rate.

Politics

One of the big unknowns for asset markets in 2019 will be the Federal Election, likely to be in March. The Labor Party, currently favoured to win the election, has proposed some changes to the tax system including reforming negative gearing, and the capital gains tax discount that currently favour real estate investing as well as changes to franking credits which will affect investments in shares.

While a lot can change in the world of politics very quickly, the proposed changes do pose another threat to an already softening housing market and may reduce the attractiveness of some share investments. Offsetting the downside risks from proposed tax reform, is the Federal Government’s budget is currently in very good shape which is likely to see voters enticed with “generous” tax cuts and spending promises from both parties. The Liberal Party will get a head start in this area next week when it releases its Mid-Year Economic and Fiscal Outlook (MYEFO).

Takeaways

While this discussion has been limited to a handful of the topics that will influence events in 2019, the domestic downside risks appear to outweigh upside risks. This is best reflected by the interest rate market that has pushed back its expectation for the first interest rate hike in Australia to late 2021, with a small probability of a near term cut now priced in before then.

As such, the risks for the AUDUSD remain to the downside from a fundamental and a technical perspective. Rallies back towards .7450/.7550 should be viewed as corrections to the downtrend and should be monitored for short trade AUDUSD set-ups with acceptable capital exposure, looking for a retest and break of the January 2016, .6826 low.

Likewise, for the ASX200, technical damage occurred after breaking below the 2-year uptrend in October. Rallies back towards 6000 will be viewed as corrective bounces and used to lighten up on equity exposure to reflect the more cautious outlook for 2019 as outlined above.

Source Tradingview. The figures stated are as of the 14th of December 2018.  Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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