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Summary.

The first quarter of 2019 saw a significant rebound in share markets after significant falls in the last quarter of 2018.  Most developed countries recorded double-digit returns with Chinese equities the standout performer.   The US powered ahead and is currently sitting at/around record all-time highs.  The Australian market also staged a strong recovery from January after falling from over 15% from August to December last year.
 
Interest rates remain steady with the RBA announcing on Tuesday this week that it will leave rates on hold.  Many economists had been expecting a reduction in an attempt to get ahead of a deteriorating economy.  The hope for many is that a drop in rates will lead to lower home loan rates and mortgage repayments, and consequently increase discretionary spending. We wouldn’t be so quick to draw that conclusion and more so expect to see widening differences between rates offered by lenders – who are facing their own commercial pressures.  We see the lending environment remaining tough for the foreseeable future as banks continue to reel from the Hayne Royal Commission.
 
The property market continues to fall - with volumes well down on previous years and a shortage of quality stock.  Some analysts have viewed the recent slowing in the rate of decline as a positive and potentially signaling a recovery of sorts in the property market, whilst others suggest we have a way to go before prices stop falling. Top end property is continuing to bear the brunt of the downturn whilst the more affordable pockets are holding up relatively well, supported by first home buyers.

Below is an overview of the main points from the last quarter and our thoughts on what lies ahead. 


Residential Property.

The housing market continued its slide throughout the quarter, although the pace of the decline is slowing. The table below illustrates what’s happening across Australia, showing the decline is widespread, affecting all states, cities and regions, aside from Hobart and Canberra.


Although there are tentative signs that the downturn is losing steam, the outlook for the housing market will continue to be affected by uncertainty related to the federal election, tighter lending policies and more broadly domestic economic conditions. Federal elections generally cause some uncertainty which is amplified this time considering the proposed investment taxation changes if Labor is elected - the Opposition have flagged that changes to capital gains tax and negative gearing would take effect from January 2020. As with all government election promises, any changes to policy still have to pass the Senate before being implemented, so we won’t fully appreciate the impact until well after the election. 

Source: Core Logic National Media Release



Interest Rates 

The RBA once again left the cash rate unchanged for the first quarter of 2019 – its longest stretch in history - however at the April meeting it was suggested that a decrease in the cash rate would likely be appropriate if inflation did not move any higher, which has now transpired. The reality is that inflation is not an issue, it is the impact on the economy of a falling housing market and its impact on spending that is the concern.
 
Although the RBA recognises that the effect on the economy of lower interest rates could be smaller than in the past, given the high level of household debt and the adjustments occurring in housing markets, a lower level of interest rates can still be expected to support the economy through a depreciation of the exchange rate and by reducing borrowers interest payments, freeing up cash for other expenditure.
 
The US Federal Reserve also left the cash rate unchanged. Fed officials have now scaled back their projected interest rate increases this year to zero (previously at two for the year), as uncertainty around both US and global growth continues.  
 
With global cash rates likely to remain low for some time, the increasing cost of funding pressure for Australian banks has eased, meaning the pressure from the public to pass on the RBA’s imminent cash rate cuts will be on. However, analysts believe that only around half of the RBA cuts will flow through to home loans, and the amount may vary markedly between lenders. This means we’re still likely to see significant rate differences between the lenders, so borrowers need to stay one step ahead by having regular debt reviews to ensure they get the best deal.


Equities

Having suffered dramatic sell-offs in the last quarter of 2018, equity markets enjoyed equally stunning reversals in the first quarter of 2019. Investors reacted positively to a perceived end to the trade wars, and comments by the US Federal Reserve changing its stance on the future direction of interest rates. Contrary to its stern rhetoric last quarter of impending rate rises, the Fed executed a dramatic U-turn to suggest that cash rates were likely to remain static for the foreseeable future.

Australian equities rose in parallel with global equity markets, albeit not to the same extent. Given the pro-risk environment and sell-off in the last quarter, smaller capitalisation stocks outperformed their larger counterparts. Demonstrating the broad-based nature of the rally, all sectors rose over the quarter; however, the materials and information technology (IT) sectors were the strongest contributors.
 
Global equity markets rose strongly over the quarter, with Chinese and US equities leading the charge. Both markets were buoyed by hopes of a solution to the trade war between the two nations. Chinese equity markets, which suffered last year due to concerns over faltering domestic growth, rallied hard as the Chinese authorities announced supportive policies. Like the domestic market, all sectors returned positively over the quarter with IT by far the best performing sector. While not the best performers, energy stocks also recovered from a dramatic fall in the last quarter, after the oil price had its best quarter since the second quarter of 2009. A strengthening Australian dollar was a negative for unhedged equities.
 
In fixed income markets, government bonds continued to do well with central bank rhetoric seen to be supportive of equities and bonds. Yields continued to fall (prices rise) over the quarter, with Australian 10-year yields falling more than their US counterparts. Investors began to price in rate cuts in Australia as the economic outlook deteriorated and the Reserve Bank of Australia became more cautious in their statements. Corporate debt also rebounded over the quarter, with below investment grade debt outperforming higher rated debt.
 
Global and domestic listed property and infrastructure were the standout performers in the first quarter, benefiting from the fall in government bond yields and a rising equity market.

Source: Zenith Investment Partners


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Image - South Melbourne Market.