Double package of things to think about
As we step into the new decade, there are plenty of topics consuming investors’ thoughts including trade wars, Brexit, the Trump impeachment hearings, US presidential elections and protests in Hong Kong.
While these issues should not be discounted completely, they are well explored and have been in existence for some time. They are all capable of moving markets briefly but as time passes, investors adjust. What typically propels a market higher or lower is the undisclosed and undiscounted factors.
I’m going to go with two considerations you cannot ignore in 2020.
What next for China?
Firstly, does China reaccelerate growth in 2020 after a period of slow down? A reacceleration would be a boon for many Australian sectors including the big miners, agriculture, tourism, education and food products. If the Chinese economy was able to outperform expectations of growth falling to below 6 per cent in 2020 it would set the Australian share market alight.
Alternatively, if the Chinese economy faltered and growth stalled then an Australian recession could easily set in.
I’m betting the Chinese economy might surprise on the upside and help the cyclical stocks that pepper the Australian market, from the big BHP to the small McPhersons stocks, and the economy as a whole would benefit.
The big 4
The second variable that cannot be ignored in 2020 is the behaviour of the Australian big 4 banks. It is critical for the domestic economy that CBA, ANZ, Westpac and NAB all increase lending growth beyond the current levels of 2 to 3 per cent.
Since the Banking Royal Commission hit town in early 2018, the banking sector has been overwhelmed with costs associated with better compliance and systems. The old objective of prudent lending has taken a back seat.
This lending strike inspired a sharp slowdown in housing construction and a dive in house prices. Soon after it curtailed general retail spending on cars, clothing, leisure etc. If loan growth managed to move into the 4 to 5 per cent range it would be fillip for the domestic economy, obviously lead by housing.
It can’t be that difficult given the loan growth rate was 10 per cent plus before the Global Financial Crisis.
Stay informed in 2020
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This wire is part of the ‘One thing investors can’t ignore in 2020’ series. To download the full ebook please click here.
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Matthew is the Principal and Portfolio Manager at Centennial Asset Management. Prior to this, Matthew was the CIO at Wilson Asset Management between 1998 and 2011, achieving 18% p.a. over the period.