This has given way to a period of sustained introspection over the next step for global markets, economies, and governments.
As we look ahead in 2019, we see the following for our asset classes:
Australian Equities
The overall picture for the Australian economy is reasonable; real GDP growth at 2.9%, unemployment at 5.2%, benign inflation and increased fiscal spending. However, looking at individuals and households provides a murkier picture – tightening credit markets, low wage growth and high debt burdens increase the market's sensitivity to a global growth downturn. With China looking shaky, reduce.
US Equities
The US will continue to grow in 2019, albeit at a slower rate than the last few years. Monetary policy is now restricting the economy and rising bond yields has shaken the market in the past few months. Volatility will continue to be elevated in the years to come but the improved valuation, slower Fed tightening, and corporate EPS growth remains an attractive investment combination.
UK Equities
Despite the uncertainties of the upcoming Brexit deal, domestic economic conditions have remained better than the consensus forecast, with stable employment, wage growth and healthy inflation since the referendum. Households are in a holding pattern of secure employment but with low wage growth, resulting in low consumer sentiment that has seen tepid retail sales and domestic consumption. We take a neutral stance as attractive valuations are offset by Brexit uncertainties; although we view Brexit as long-term positive for the UK.
Listed Property
The sector came under pressure in 2018 from higher bond rates and weak retail sales. Our strategy is focused on Office and Industrial properties, which delivered strong returns against a weak overall market. We remain positively disposed to the long-term tailwinds of population growth that these segments are exposed to; we are cautious on retail and diversified REITs.
Interest-Bearing Securities
Over the past 12-months, the yield curve has flattened due to higher short-term rates and lower long-term rates. This trend is favourable for the short duration, floating rates securities targeted by the CH IBS Strategy. The rise in BBSW has improved the portfolio yield, supporting an increase in allocation at a time of heightened volatility in other markets.
Australian Dollar
Australia's currency is strongly correlated to commodity prices, which we expect to come under some pressure due to weaker demand from China. Accentuating this downward bias is the opposing path of bond rates in Australia and the rest of the Developed World.