The Road Ahead

Keeping an eye on further volatility in 2019

Global equity markets went into a tail spin during October 2018, fuelled by fears the US Federal Reserve might raise interest rates too aggressively and keep unwinding its balance sheet, to cool down the American economy.
 
Markets remained volatile through to the end of 2018. The US S&P500 index fell almost 20 per cent by Christmas eve, compared to its high point in September.
 
Although much of those losses have been recovered since the start of 2019, we believe there’s a good chance that the volatility will continue throughout 2019.
 
There are a number of ongoing risks to global markets in 2019:
 
  • There is continued uncertainty concerning the US Federal Reserve’s future interest rate policy. If new economic data indicates that US inflationary pressures are building, the Federal Reserve could speed up interest rate increases, taking them to less stimulatory levels. The Federal Reserve also built up its balance sheet to more than US $4 trillion, buying bonds and other assets from banks, to pump liquidity into the financial system in response to the GFC. This helped inflate asset prices. Those prices could deflate quickly if the Federal Reserve lets its balance sheet reduce too quickly.
     
  • The trade war between the US and China also presents further uncertainty. Further escalation of the trade war could put more pressure on China’s waning economic growth. This may have ramifications for other countries like Australia.
     
  • Falling Australian residential property prices have the potential to have a large negative impact on consumer spending, the building and construction sector and banking shares. If housing prices continue to slump during 2019, the prospect of reduced mortgage lending growth and lower spending from less-wealthy consumers could impact heavily on bank profitability.
     
  • Potential policy changes to negative gearing, capital gains tax rebates and dividend franking refunds could create further downside pressure on bank shares and housing prices.
     
These potential risks for 2019, combined with many asset sectors still being valued at historically high levels, have led Rest to continue reducing the Core Strategy’s share market allocation during the current first quarter of the calendar year.
 
This is consistent with our active management investment belief to protect against downside risks. This more defensive positioning may also provide the opportunity to invest at cheaper prices should market volatility continue through 2019.