Strong returns in 2019 increases the chance of volatility in the market for 2020, according to State Street Global Advisors (SSGA).
Bruce Apted, SSGA head of portfolio management – Australia active quantitative equities, said lower interest rates translated into higher net present values for companies, which was expected to support future growth and encourage investors to move from cash into riskier assets.
“When macro factors such as these play a larger role in stock movements investors tend to be less discerning and equity mis-pricings more likely,” Apted said.
“The most expensive companies became even more expensive by the end of 2019.
“Should growth meet the lofty expectations embedded in these valuations, then current levels will likely be supported, but should growth not materialise then volatility could return in 2020.”
The Australia equity market generated above average returns in the year 31 December 2019, with the S&P ASX 300 Index up 23.8%.
Healthcare was the best performing sector at 44.9%, followed by IT (37.4%), staples (33.4%) industrials (27.8%) and materials (27.2%).
Apted said while some sectors experienced improvements in their earnings forecasts (healthcare, staples, materials, real estate and discretionary) other sectors witnessed declines (energy, banks, utilities and IT).
“Arguably IT was the standout anomaly. IT returned 37.4% in 2019, while analysts’ estimates for this sector actually declined,” Apted said.
Performance of the S&P ASX 300 Index and associated sectors over the year 31 December 2019
Source: Thomson Reuters, SSGA
