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Improving conditions to drive modest equity returns

money
By Sarah Kendell
January 13 2020
1 minute read

Modest economic growth and equity market returns are expected for 2020, with the stimulus provided by income tax cuts and the rebounding property market expected to impact positively on the Australian economy, according to Colonial First State.

In a recent blog post, CFS senior investment manager George Lin said that while Australian economic growth had slowed in 2019, the effects of the government’s 2019 income tax cuts and the improvement in the property market were likely to drive slightly improved growth in 2020.

“We anticipate that more accommodative monetary policy, the reduction in income tax in July 2019 and the recovery in house prices seen in the second half of 2019 may stabilise the economy, helping Australia maintain its record of uninterrupted economic growth since the early 1990s,” Mr Lin said.

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He added that this was likely to drive positive returns in the equity market, but price growth was likely to be limited by the fact that valuations were already stretched in many companies.

“Given most share markets are already trading at around fair value through measures such as forward price/earnings and price/book, we expect modest returns [from equities] in the single digits,” Mr Lin said.

“Stronger economic growth could also exert some upwards pressure on bond yields, but that trend should be constrained by low inflation and central banks’ dovish forward guidance.”

More broadly, Mr Lin said, global economic growth was likely to be highly reliant on the fate of the Chinese economy, which could be constrained by the impact of US tariffs.

“The trade war has undoubtedly made the transition of the country’s economy from an exports and investment-driven economy to a consumer-oriented economy more treacherous,” he said.

“However, the Chinese economy is a hybrid market economy in which the authorities retain many policy levers, many of which the authorities began using in 2017 and could continue using, such as lowering banks’ reserve requirement ratios to support the Chinese economy and avoid a hard landing.”