Investment climate still a concern in the wake of a bad week on the Australian Stock Exchange


Australian shares suffered their biggest week of declines this year, as $74 billion in market value was wiped off in just two trading sessions

6 October 2019 | Staff Writers

As expected, when there’s a market rout, the big banks were the biggest drag on the ASX in the week gone by, they saw more than $11 billion wiped off their value on the market lows. A very weak gain on the ASX200 of 0.37% for the final trading session signaled anything other than optimism.

In a note to investors, AMP Capital Chief Economist, Shane Oliver, says the future is far from certain, “Share markets remain at risk of further falls and volatility in the months ahead given unresolved issues around trade and Iran, impeachment noise and weak global economic data,” he stated.

“But valuations are okay – particularly against low bond yields, global growth indicators are expected to improve by next year and monetary and fiscal policy are becoming more supportive all of which should support decent gains for share markets on a six to twelve-month horizon. Low yields are likely to see low returns from bonds once their yields bottom out, but government bonds remain excellent portfolio diversifiers.

“Unlisted commercial property and infrastructure are likely to see reasonable returns. Although retail property is weak, lower for longer bond yields will help underpin unlisted asset valuations. The Australian federal election outcome, rate cuts, tax cuts and the removal of the 7% mortgage rate test are driving a rise in national average capital city home prices led by Sydney and Melbourne.”

Dr Oliver cautioned residential property investors not to expect any significant short-term returns, “Beyond an initial bounce, home price gains are likely to be constrained through next year as lending standards remain tight, the record supply of units continues to impact and rising unemployment acts as a constraint. Cash and bank deposits are likely to provide poor returns as the RBA cuts the official cash rate to 0.25% by early next year.”

With widely predicted RBA rate cuts, Dr Oliver’s target for the Australian dollar is a valuation of around $US0.65; not good for importers but certainly a positive for Australian companies targeting the Chinese market.

A solid jobs report in the US helped stocks rally in the final day of trading for the week, the S&P 500 had its biggest single day rise in seven weeks; however, overall the market was well down. A fall in the US ISM Manufacturing Conditions report to its lowest level since 2009 weighed heavily markets; not helped by similar flat surveys in Japan and the Eurozone.

Dr Oliver does not believe recession is inevitable in the United States or Australia, he points to assets such as shares trading at reasonable valuations and also the lack of overheated market activity which normally precedes a crash.