INVESTING

THE BIG QUESTIONS FOR 2019

Q WHAT WILL BE THE STANDOUT SECTORS AND WHAT ISSUES DO INVESTORS NEED TO WATCH OUT FOR?

Uncertainty is rising as the global economic and investment landscape become more challenging. The outlook for the global economy is becoming increasingly clouded. Consequently, investors should be prepared for potentially lower returns and higher volatility in equity markets and diversify accordingly.

We would expect global growth to become increasingly de-synchronised as efforts by central banks to remove stimulus continue and geopolitical concerns start to weigh. The US economy will remain a standout, fuelled by less-than-appropriate fiscal stimulus. But as stimulus wanes and the impact of monetary policy tightening is felt, a deceleration in growth is expected.

The Euro zone is decelerating, with an over-reliance on German growth and instability in Italy key concerns. Japan’s economy will remain reliant on hugely accommodative policy for even modest growth. The UK is beset by problems of its own making as Brexit negotiations grind on.

Emerging market economies have fallen out of favour as they struggle under the weight of tighter US dollar financial conditions. And it remains to be seen if China can re-stimulate growth that had decelerated as authorities sought to de-lever the economy as it becomes increasingly challenged by US trade policy.

With all these dynamics at play we’d expect investors to continue to de-risk their portfolios, from growth strategies leveraging global expansion to those more balanced by defensive assets, particularly fixed income. We’d also highlight the importance of broader diversification in such an environment, with infrastructure playing a role in a de-risked portfolio (particularly via super).

In Australia the key question will be whether the Reserve Bank will raise its interest rate. It will all depend on wages and the household income growth needed to underpin not only the outlook for inflation but consumer spending and the property market.

Indeed, on the latter the bank has never started a policy tightening cycle while median prices have been in outright decline, nor has the household sector ever held as much debt. The risk is that rising interest rates will push sectors leveraged to the residential cycle into a down trend and maintain pressure on discretionary retail spending. Infrastructure spending should continue to support the construction sector narrative where residential leaves off.