ThinkMarkets – December market update

Welcome our monthly market series brought to you by Bethel Loh, Macro Strategist for ThinkMarkets, our financial trading partner.

As we turn the page on what has been a polarising year for bulls and bears, we’re reminded more than ever that the Australian story remains highly dichotomous yet cautiously optimistic stepping into an energised 2020. ASX 200, Australia’s major equity benchmark, appears set to register a stellar gain of 20% on the year having been led higher by three RBA rate cuts, a global resurgence of risk and an ostensibly better narrative around US-China trade uncertainty and Brexit.

But the climb has not been easy, and so, while the ASX cements at or near all-time highs – we recognise that an upturn of lingering economic fragilities could open the door to an increasingly temperamental 2020 performance.

A driving factor of equity temperament crucially depends on the trajectory of the RBA.

It’s argued that monetary policy in Australia might be less supportive (unlikely) in 2020 as Gov. Lowe precipitates a wait-and-see mode having imposed three interest rate cuts since the middle of the year. The RBA, only two cuts off an effective lower bound of 0.25%, could very well save its two bullets for larger economic shocks, or implore the greater use of untried unconventional policies and dormant fiscal spending.

Weak domestic data and subdued wage inflation though most likely sees the RBA persist on a path of dovish guidance. Should spare capacity continue to reign supreme in 2020 thereby administering a lack of wage pressures, and in turn, soft consumption growth – our clients are likely to rest easy knowing the RBA’s liquidity backstop won’t be eradicated anytime soon.

Overstretched valuations have been a growing consideration as well with the 2019 run-up in the ASX largely pointing to multiples expansion as oppose to solid earnings growth. While it’s unlikely to pose an issue in the short-term given the persistence of negative rates in Europe and Japan, Aussie stocks may inch towards less attractive territory on a carry basis if fundamentals continue to lag and G10 central banks begin to demonstrate a slow turnaround in easing cycles.

Though, Australia’s housing turnaround, stabilising consumer confidence and dissipation of growth disruptions in drought and fire are all able to drive domestic improvement relative to expectations. Therefore, better local and global dynamics for the Aussie economy see our clients retain a bullish tilt towards the ASX – and in particular – higher quality stocks that are favourably positioned against an uptick in volatility, which sit at historically low levels.

Elsewhere, the external backdrop in US-China trade and Brexit continues to massage the level of systematic risk priced-in across global markets and should be monitored closely. December saw these risks recede substantially as a phase-one deal was agreed in principle and pro-Brexit Johnson claimed a landslide victory in the UK election. However, markets remain nervous about phase-one translation and Johnson’s “cliff-edge” hard Brexit.

Happy trading and stay nimble.

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