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2019 economic growth
This precis of thoughts from Shane Oliver - Head of Investment Strategy and Economics and Chief Economist of AMP CapitalThree reasons why Chinese growth won’t slow much
The Chinese Government’s tolerance for a sharp slowing in growth is low given the risk of social instability it may bring.
Monetary and fiscal policy is being eased.
In the absence of much lower savings (the main driver of debt growth), rapid deleveraging would be dangerous, and the Chinese Government knows this.
Four reasons Australia still won't have a recession
A downturn in the housing cycle and its flow on to consumer spending will detract around 1 to 1.5 percentage points from growth, and growth is likely to be constrained to around 2.5-3%, but recession is still unlikely:
The growth drag from falling mining investment (which was up to 2 percentage points) has faded.
Non-mining investment & infrastructure spending are rising.
Interest rates can still fall further, and the RBA is expected to cut the cash rate to 1%.
The $A will likely fall further providing a support to growth.
Three reasons why the RBA will cut rates this year
The housing downturn will constrain growth to at or below potential.
This will keep underemployment high, wages growth weak and inflation lower for longer.
The RBA may ultimately want to prevent the decline in house prices getting so deep it threatens financial instability.
Three reasons why a grizzly bear market is unlikely
Shares could still fall further in the short term given various uncertainties resulting in a brief (“gummy”) bear market before recovering. But a deep (or “grizzly”) bear (where shares fall 20% and a year after are a lot lower again) is unlikely:
A recession is unlikely. Most deep grizzly bear markets are associated with recession.
Measures of investor sentiment suggest investors are cautious, which is positive from a contrarian perspective.
The liquidity backdrop for shares is still positive. For example, bank term deposit rates in Australia are around 2% (and likely to fall) compared to a grossed-up dividend yield of around 6% making shares relatively attractive.
Seven things investors should allow for in rough times
Times like the present are stressful for investors. No one likes to see their wealth fall and uncertainty seems very high. I don’t have a perfect crystal ball, so from the point of sensible long-term investing the following points are worth bearing in mind.
First, periodic sharp setbacks in share markets are healthy and normal. Shares literally climb a wall of worry over many years with periodic setbacks, but with the long-term trend providing higher returns than more stable assets. The setbacks are the price we pay for the higher long-term return from shares.
Second, selling shares or switching to a more conservative strategy after a major fall just locks in a loss. The best way to guard against selling on the basis of emotion is to adopt a well thought out, long-term investment strategy.
Third, when growth assets fall they are cheaper and offer higher long-term return prospects. So, the key is to look for opportunities that pullbacks provide.
Fourth, while shares may have fallen in value, the dividends from the market haven’t. The income flow you are receiving from a diversified portfolio of shares remains attractive.
Fifth, shares often bottom at the point of maximum bearishness. So, when everyone is negative and cautious it’s often time to buy.
Sixth, turn down the noise on financial news. In periods of market turmoil, the flow of negative news reaches fever pitch, which makes it very hard to stick to a well-considered, long-term strategy let alone see the opportunities.
Finally, accept that it’s a low nominal return world – low nominal growth and low bond yields and earnings yields mean lower long-term returns. This means that periods of relative high returns like in 2017 are often followed by weaker years.