Here’s what caused the market downturn
Mark Rider explains that companies’ expectations of lower earnings were a key force in pushing the sharemarket down.
Returns on sharemarket investments were lower in the last three months of 2018 than the rest of the year. That was a result of the ‘correction’ in global markets at the end of 2018.
After the impressive investment returns of 2017, more modest returns in 2018 were to be expected. However, the large correction in late 2018 was driven by downgrades in market expectations of listed companies’ earnings growth, most importantly in the US.
Snapshot of market performance
US shares, which performed strongly for most of 2018 on the back of a buoyant economy and large tax cuts, fell sharply, ending the year down 6.2 per cent. This correction was caused by slower global growth, lower oil prices, the impact of higher rates, a stronger US dollar, and the drag from the trade war and higher tariffs. Given these conditions, the US central bank will likely pause rate hikes at least through the first half of 2019, to give the economy some breathing room.
European growth slowed earlier than the US, due to softer Chinese growth and the impact of trade wars. Brexit issues remain unresolved even as the deadline looms, with Britain scheduled to leave the European Union in March, 2019. The shift in Italian politics has added to debt concerns. And France is dealing with ongoing protests from the gilets jaunes (yellow vests) – a grassroots movement calling for economic justice.
China’s growth has continued to slow and is a significant drag on global growth. US President Donald Trump’s trade war has likely escalated the slowdown. While the Chinese government is now trying to stimulate its economy, the country’s elevated level of debt will likely mean the effect of any stimulus effort will be much more modest than a similar effort in 2015.
In Australia, credit conditions have tightened and house prices have fallen substantially in Sydney and Melbourne, with further falls expected in 2019. We expect economic growth to slow, but remain solid. With the Reserve Bank of Australia putting any interest rate rises on hold, it is the performance of the global economy that remains the key risk to the Australian economy.
The Australian dollar ended the year fractionally above US70¢, which is down 10 per cent from where it was a year ago. The decline in the Aussie reflected weaker Chinese and global growth and the possibility of further US rate hikes throughout 2019. However, reduced expectations for US rate hikes have seen the Australian dollar drift higher.
For the year ahead, ANZ’s Chief Investment Office expects a ‘gradual slowdown’ of global growth, but not a global recession. In this environment we expect shares to generate below-average returns, potentially not a lot better than bond markets.
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