At First Financial it is our job to understand the investment world and to be aware of local and international developments that can impact the recommendations we make to our clients.
Our Investment Committee regularly reviews our approved products list and, in doing so, has noted three market influences to consider when investing in 2019.
Australian housing market
If you read the news you will know that the Australian housing market has experienced a decline through 2018 and research indicates that this downward trajectory is expected to continue in 2019.
Almost every major city has experienced a weakening in dwelling prices, with Sydney and Melbourne the worst affected.
In January, CoreLogic* reported that Sydney’s market experienced an 8.9% annual decrease through 2018. Similarly, Melbourne’s annual value was down 7% at the end of last year. Regional Tasmania has experienced some gains and the rate of decline has slowed for Darwin, but the overall trend is downward.
Graeme Quinlan, First Financial Senior Adviser and Head of Investment Committee, explains,
“In Australia it does appear as though the negative wealth effect from the decline in property prices is a significant driving force. People seem to be battening down the hatches.
We are certainly a very indebted housing sector. The general view is that people with large mortgages will reduce their spending as the value of their home decreases… that could flow through to a dip in consumer demand, which could impact the retail sectors, including retail property and real estate investment trusts.”
When housing prices start to drop it is not uncommon to see a downturn in other markets. For example, domestic consumption of goods and services, employment stability and even share prices of major retailers and banks. Graeme continues,
“There are also other factors involved. We have seen banks tightening credit and interest only loans versus principal/interest lending.
Year on year there’s also been approximately an 80% collapse in foreign demand for property. There was a lot of foreign money supporting the demand, but it has now fallen away.”
With the Federal election looming, insecurities around the political environment can also have a negative influence on the market.
“There’s fear relating to some of the Australian Labor Party’s proposals for negative gearing and capital gains tax… that uncertainty could have an impact as well.”
“The Investment Committee is putting the microscope on those areas of the market and understanding what the risks are and how this influence will flow through.
We have a very robust process where we look to invest in businesses that have a significant moat or a competitive advantage. Again, in times like this, it’s important to see if they are still a good investment choice. We are being very cautious with anything that is susceptible to consumer decline.”
Global investment markets
Currently two of the major influences within the global investments market are China and the United States of America (USA). These massive economies have significant sway over global growth and as China slows and the USA faces its own challenges, there is a ripple effect felt around the world.
“China is still going through its transition from an infrastructure-based economy to a consumer based one. They are looking to reduce debt and because of the controls on their financial system we believe that is manageable but is likely to mean slower growth compared to previous years.”
As for the USA, the Federal Reserve’s policy can have a big impact on the US share market, which in turn has a major influence on the world market. When interest rates are rising it can depress share prices, as higher interest rates mean higher borrowing costs for individuals and businesses. This can lead to lower consumer and business spending, dampening the economy. Graeme further explains,
“The key factor that caused the US market downturn in October and November 2018 was the Fed posturing that they were considering three or four rate rises in 2019. The market subsequently recovered when they eased off that policy this year.
It has reminded us that they have substantial weight on the global situation. A lot of our focus relates to what might happen with the monetary policy in the US.
The US is still growing solidly, but we are mindful that we are in the late part of a bull cycle. Any of these factors that come out of left field could move markets quite significantly.”
First Financial’s Investment Committee has a lot of information at hand.
“We can be confident that we have the big picture. We understand how the market might move and what to watch out for in the coming months.”
The US-China trade war and Brexit drama continue to make news headlines and global tensions continue to cause instability within investment markets. Graeme says that the Investment Committee is very aware of how this can create volatility.
“In the short term, we know these issues are not meaningless. They can certainly cause the market to be more volatile, but we also recognise that protectionist measures don’t benefit anyone in the long term.
For example, the trade issues in Europe… sure it is a messy situation with Brexit not resolving itself, but we believe trade deals will be negotiated and that it will not have a long-term impact. It might create a spike this year but over five to ten years it will not drastically affect global markets.
The US China situation is also big news in the short term. It could cause the equity market to re-rate. But again, long-term, if we look to the future, one or two presidents out, it might not be as big an issue.”
First Financial’s investment philosophy focuses on building investment portfolios for the long term, so while the Investment Committee takes these current pressures into account, the focus continues to be on high quality investments that will provide long term growth. Graeme finishes with,
“We are populating portfolios with investments that we think will remain robust during a slightly more volatile period, trying to cull out investments that might be exposed to risks, It’s about preservation of capital.”