One of the difficult questions for investors is whether equity valuations deserve to be higher because of the large falls in interest rates in recent years. The subsequent rush into equities has been labelled TINA as in There Is No Alternative.
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The bears are coming out to play. There is more talk in the press and by market commentators of the risk of recessions in the US and other countries and, depending on what you are reading, threats of another global financial crisis (GFC) event due to surging debt, income inequality, political risk, market liquidity and valuations.
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After the post-election rally, we are downgrading our recommendation on Australian equities to underweight. There are a number of factors that are driving the downgrade.
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We appear to be on the cusp of a radical change in the approach to monetary policy in the US. The Federal Reserve (Fed) has recently abandoned plans for further rate rises, declared an early termination of quantitative tightening and announced a strategic review of its monetary policy framework.
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The Australian reporting season was disappointing, with significantly more misses than beats and a large number of downgrades to forecasts for FY19 and FY20. There was some offset from a number of special dividends, although dividend forecasts were cut in a range of sectors.
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One of the critical issues for 2019 is the extent to which China steps back from its reform agenda and allows a re-acceleration of credit. January’s record credit data suggests this might now be occurring.
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Australian equity valuations improved during the year-end sell-off but they did not become compelling. The forward price to earnings ratio (PE) briefly dipped below historical averages, however, the positive start to the year has pushed the market back above this metric.
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As 2018 comes to a close the political noise is deafening on a range of familiar issues. Fortunately, many of these event risks should pass early in 2019 and leave no permanent scars.
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A large part of the market weakness since early October has been the number of event risks that have been hovering in the political and economic landscape for some time that are now coming to a head. Some have been resolved in recent weeks, while others are yet to be resolved.
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The slowdown in the Chinese economy has become a critical issue for investors. Not only is it important for the global macro outlook, but it is also becoming a major factor in the trade war between the US and China.
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