Shares, property, interest rates and the economy: What to expect this year
The next 12 months will give investors plenty to chew over. Here’s what three top economists predict for shares, property, interest rates and the economy.
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A US presidential election, the trade war between the world’s two biggest economies, a Brexit deal and, if the Reserve Bank governor is reading the tea leaves correctly, a “gentle turning point” for Australia’s economy — there’s plenty happening. Three of Australia’s top economists tell us what it means for the markets ...
The year ahead is set to once again give investors plenty to chew over. Business Daily asked National Australia Bank’s Alan Oster, AMP Capital’s Shane Oliverand UBS’sCarlos Cacho to map out what we can expect for 2020.
INTEREST RATES
Interest rates — or rather, how low can they go, how long will they stay there and will we get unconventional monetary policy measures — was the key point of focus for investors in 2019.
That is unlikely to change this year as central bankers across the globe continue to play an outsized role in the shape of the economy.
The Reserve Bank delivered three rate cuts in 2019, including back-to-back moves in June and July, to take the cash rate to a historic low of 0.75 per cent.
Few economists think the RBA is done as it faces sluggish economic and wage growth, and an inflation rate which stubbornly refuses to return to the central bank’s long-term target of between 2 per cent and 3 per cent.
Alan Oster expects two more cuts to take the cash rate to an unprecedented 0.25 per cent by the middle of 2020.
The first will be delivered in February, Mr Oster tips.
But, the veteran economist warns it won’t be enough.
He expects the RBA to then launch quantitative easing where it will begin issuing new currency and buying bonds from banks, increasing the money supply in a bid to encourage more lending and investment.
“We don’t expect the government to do too much in terms of fiscal policy, which we think is a mistake, so it means the RBA is going to have to do more of the heavy lifting,” Mr Oster says.
Shane Oliver tips the same — two more cuts to take the cash rate to 0.25 per cent by the middle of 2020 after which the RBA will launch quantitative easing.
The RBA may hold off on a bond-buying program if the federal government pushes through a new round of tax cuts at the May Budget, Dr Oliver says, but that seems unlikely given its commitment to a surplus.
“The government seems more focused on putting money aside for a really rainy day; in other words building up the surplus and relying on the RBA to do the heavy lifting in terms of stimulus,” Dr Oliver says.
Carlos Cacho agrees with the view that the cash rate will hit 0.25 per cent — a level which the RBA has indicated it won’t cut beyond — by the middle of 2020.
But Mr Cacho expects the RBA to hold off on quantitative easing and instead use another unconventional policy measure — so-called forward guidance.
This is where the RBA will make it abundantly clear to anyone prepared to listen that interest rates will not be rising anytime soon.
“They (RBA) is already guiding the market that rates will remain lower for longer,” Mr Cacho says.
“We think it could strengthen that to say rates will remain low until inflation returns to the (RBA’s) inflation target band.”
PROPERTY
The sharp bounce back in house prices was one of the few areas of the economy which surprised to the upside in 2019.
House prices peaked in Melbourne and Sydney in mid to late 2017 before falling 11 per cent and 15 per cent, respectively.
They bottomed out in both cities in the middle of 2019 as interest rates were slashed to record lows, stress tests for new home loans were relaxed and a surprise federal election result removed uncertainty about the future of negative gearing.
Prices in the nation’s two largest cities have since bounced back by more than 7 per cent, pulling the nation out of its worst housing downturn in more than 30 years in far quicker fashion than most economists had tipped.
Mr Oster says house prices in Melbourne and Sydney are set to rise by 10 per cent in 2020 as low interest rates and a more relaxed approach to lending by banks entices buyers.
“The property market to some extent overdid it,” he says of the downturn.
“The unemployment rate really matters and it was never high in Sydney or Melbourne.”
Dr Oliver also expects strong growth this year, tipping both cities to post house price gains of 12 per cent.
At that level Melbourne would hit a new record house price in February while Sydney, where prices fell more deeply, would have regained all its losses, and then some, by May.
“We are still looking at more interest rate cuts, there is still a bit of pent-up demand out there and the level of housing stock on the market is still relatively low,” Dr Oliver says.
“Against that backdrop there is still more upside. As always in Australia you get to a point where FOMO (fear of missing out) takes over.”
Mr Cacho expects Melbourne and Sydney house prices to rise by at least 10 per cent.
He estimates lower interest rates and the easing of home-loan stress tests by the banking regulator has increased a homebuyer’s borrowing power by 20 per cent.
“We are seeing people use that firepower,” Mr Cacho says. “The property market has certainly turned.
“The combination of greater borrowing capacity and more confidence seems to be driving a very strong increase in demand, especially for Sydney and Melbourne.”
SHARES
The Australian share market notched up its best year in a decade in 2019 in a run which added close to $340 billion to the value of the nation’s biggest listed companies.
All up, the nation’s key sharemarket benchmark, the ASX 200, gained 18.4 per cent.
The year of gains resulted in the index, which broadly tracks the value of the nation’s 200 biggest listed companies, finally break through its pre-GFC high in late July.
It then lost some ground as investors took profits but was at a record closing level of 6863.9 points in late November.
Money has flowed into stocks as interest rates have fallen — prompting investors to pull their cash from fixed interest rate products such as term deposits and to buy higher-risk but higher-returning investments such as shares.
That trend is expected to continue in 2020, although most market watchers expect returns to be more subdued.
Mr Oster says the ASX 200 should rise 5 per cent to 7 per cent over 2020.
“Lower interest rates should be good for equities because people are going to be searching around and asking ‘where the hell do I put my money to get a return?’,” he says.
Dr Oliver expects lower interest rates and a slight uptick in economic growth to push stock prices up about 4 per cent to 5 per cent.
That would take the ASX 200, which tracks the nation’s 200 largest listed companies, through the 7000 point mark for the first time, he says.
“Australian shares are likely to do OK,” Dr Oliver says.
Mr Cacho says a low interest rate environment would prompt investors to pile into high-quality companies which are paying good dividends and have clear growth potential.
Any move by the RBA to launch quantitative easing is also likely to cause the Aussie dollar to fall against its US counterpart.
“That would be supportive of companies earning income from overseas,” Mr Cacho says.
THE ECONOMY
RBA governor Philip Lowe says the economy appears to have reached “a gentle turning point”.
Other economists are not so sure.
The economy was, at best, described as sluggish in 2019 and few see that changing in the year ahead.
Economic growth slowed from 2.3 per cent to 1.7 per cent over 2019.
That took growth to its lowest level since 2009 as the unemployment rate ticked up from 5.1 per cent to 5.3 per cent.
Mr Oster says he expects economic growth to recover to 2 per cent by the end of 2020.
Although that is an improvement, growth will remain well below the 2.75 per cent the RBA is forecasting.
Mr Oster warns that the downturn in new home building — a key economic driver — will continue and the unemployment rate will hit 5.5 per cent by the middle of the year.
He also notes that the economy is largely being powered by spending on public works rather than a dynamic private sector.
“Growth won’t be that wonderful,” Mr Oster says.
“The consumer will remain weak.
“They will spend what they have to but with low wages and not a lot of more tax cuts coming, they will be very wary of discretionary spending.”
Dr Oliver expects economic growth to be in the range of between 2 per cent and 2.2 per cent during 2020 and the unemployment rate to hit 5.7 per cent.
On the positive side, stronger house prices and the impact of tax cuts will eventually encourage people to spend, Dr Oliver says.
“That will happen at some point,” he says.
“Initially people save any rate cut or tax cut but eventually they get around to spending it.”
Mr Cacho expects Australia’s economic growth to rise slightly to 2.1 per cent and the jobless rate to drift up to 5.5 per cent.
“Things have stopped getting worse but we are not really seeing things get any better,” he says.
“The RBA’s forecasts remain a bit optimistic in our view.”