Global growth is set to continue for 2020 but modestly, with Australian shares to be constrained to around 9% as the bushfire disaster drags the economy, according to AMP Capital.
AMP Capital head of investment strategy and chief economist, Shane Oliver, said there would be a rebuilding boost in relation to the bushfires but there was an increasing risk that because they were so widespread and had been going on for so long, it would lead to a noticeable negative disruption to economic activity.
“[The bushfires] will increasingly weigh on the national psyche further depressing consumer spending as Australians feel even less motivated to spend when their fellow Australians are suffering,” he said.
“The bushfires will only add to the pressure for more Reserve Bank of Australia (RBA) easing and Federal fiscal stimulus – with the latter initially coming in the form of help for affected communities.”
Oliver said a slight rise in yield through the year were likely to result in low bond returns, and unlisted commercial property and infrastructure were likely to continue benefitting from the search for yield. However, the decline in retail property values would still weigh on property returns.
Cash and bank deposits were likely to provide very poor returns with the RBA expected to cut the cash rate to 0.25%.
While share markets experienced a strong start to the new year, gains were somewhat reversed as tensions escalated between Iran and the US.
During the first week of the year, US equities were up 0.1%, Eurozone shares were up 0.8%, Chinese shares up 1.2%, and Australian shares were up 0.7%.
“The latest Iranian tensions has seen oil prices spike 3% and safe haven demand has generally pushed bond yields down, metal prices down and the gold price up,” Oliver said.
“The Australian dollar rose briefly above US$0.70 into year-end on the back of a weakening US dollar but has since fallen back on the back of renewed Iranian tensions.”
He noted that the shift to monetary easing globally, the de-escalation of the US/China trade war, and economic conditions that did not turn out as bad as expected gave optimism for stronger global growth in 2020.
Aviva Investors said it expected global growth to pick up to around 3.25% in 2020, up from 3% last year, and risks were more balanced though still tilted slightly to the downside.
Aviva Investors head of investment strategy and chief economist, Michael Grady, said: “Modest improvements in both the growth outlook and risk sentiment have encouraged us to take a more positive view on risk assets. At this stage of the cycle, we prefer to be overweight global equities and have a broadly neutral view on global bonds.
“Although many equity valuations are at or above longer-term averages, we think some further margin expansion is possible given low discount rates, while a gentle recovery in earnings growth should also help.
“Neutral allocations to fixed income – government and corporate – are justified by the tension between the growth recovery but low inflation and accommodative central banks.”
Oliver said cyclical, non-US and emerging market shares were likely to outperform in the year, particularly if the US dollar declined and the expected trade threat receded.
Ausbil Investment Management’s chief investment officer and head of equities, Paul Xiradis, said rates would remain lower for longer globally and expected governments to add more fiscal stimulus.
“This could also include increased infrastructure spending. An Australian dollar trading in the range of 67 to 72 cents is likely to ensure commodities and other Australian exports remain attractive and support the local economy,” he said.
He noted that China’s ability to maintain growth would help support Australia and world growth.
“The most salient we see as being the risk of deflation, the breakout of a currency war, and the risk that the US and China don’t finalise agreements on trade,” Xiradis said.
“In terms of equity valuations, there remains a clear risk around any rise in official rates, but we have seen very clear intentions expressed by central banks that for the foreseeable future, rates will remain low or on hold.
“That said, a scenario where rates rise would likely align with more exuberant economic growth so in such an environment one would expect business to continue to thrive in a manner supportive of equities.”