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2019 is just a few months away. So when we sat down with Natalie Tam, Investment Director at Aberdeen Standard Investments, we took the opportunity to ask her what she thought the key market issues could be next year. She touches on 5 key issues including the prospect of a Royal Commission into energy affordability.

In this short interview, she tells us: “the elephant in the room is energy and affordability around energy. There's a high chance that the government could initiate a Royal Commission into energy as well. So that would be obviously negative for utilities like AGL”. Read on for the video with transcript for what to keep on your radar for the year ahead.

Edited transcript

“Heading into 2019, I think it is going to be a real exciting year actually. And I think there are a few key things that we're going to be looking at quite closely.

Issue 1: What's popular among voters?

The first one is the federal election. And when you think about an election you've got to think about what is popular among voters. And then you look at things like the Royal Commission into financial services. That was actually polling at a 65% approval rating just for that policy two years before they even implemented it. And the previous banking levy also polled really well. So you can see that banks could become a pretty useful political football as we head into an election.

The other things that are important to voters are affordability, and the cost of living. And we've already seen the Labour government come out with a 2% cap on private health insurance premium rates, which is obviously negative for private health insurers and looking further down the supply chain, to private hospitals.

Issue 2: A Royal Commission into the energy sector

But I think the elephant in the room is energy and affordability around energy. And I think there's a high chance that the government could initiate a Royal Commission into energy as well. So that would be obviously negative for utilities like AGL, which has already been under a lot of political pressure ever since they announced that they were closing the Liddell coal-fired plant.

Issue 3: Going against the status quo - a new norm?

So those are two key issues. And then I think a third thing to think about that's different to this election versus other ones is that there's been a global social trend towards voters being dissatisfied with incumbents. Case in point is obviously what happened with the election of President Trump in the US. Nobody saw that coming, but it really spoke to voters being dissatisfied with the status quo.

And depending on what polling that you look at, one in three Australian voters are showing a preference to a third party. Now how that translates on election day, we'll have to wait and see. But it does show that there is potential for unintended consequences. Policies that we may not have seen coming may start to come through. So we're going to have to watch that really closely.

Issue 4: The US-China trade war

And then as we head into 2019 we'll also be watching the US-China trade war and whether that starts to de-escalate. Because I think if we take a one to two-year view, we do expect Washington will want to renegotiate for freer and fairer trade. And there will be some opportunities around the volatility that that brings.

Issue 5: A rotation to quality

And then finally, we will be watching bond yields very closely. So bond yields obviously feed into market valuations for DCF’s and as bond yields go up, those valuations do take a bit of a knock. And obviously at some point bond yields will reach a point that triggers a general rotation out of equities into bonds. And as that rotation I think gains traction, you probably will see more of that selling of the higher PE names that have done really well to lock in those profits, and possibly a flight to quality in equities too”.

Further insights

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