MARKET UPDATE

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James Kelly 17 December 2018

The last three months have seen corrections in both the Australian share market and domestic property market. While the falls have been sharp, the long term outlook remains strong and recent activity is widely seen as part of the normal market cycle.

The Australian share market performance can be attributed to three main factors, which all stem out of the US and have seen us follow their market. The ASX 200 peaked at 6,373 on the 30th August 2018, which was a 10 year high for our market and has since fallen to 5,602. This is a drop of 12%. Key issues in the US include President Trump’s ongoing trade dispute with China, the US Federal Reserve’s raising of interest rates and the fact the S&P 500 hit an all time high on 20th August 2018. Much like the situation with our property market, the US share market had to correct at some time and couldn’t maintain the long run of positive growth.

There is however good cause for optimism as behind this recent market performance are strong economic numbers. Unemployment in both the US and Australia remains low and the Morrison government is due to deliver a budget surplus in next year’s budget. While capital returns (as measured by the managed fund unit or share price) have not been strong, investments have continued to provide good dividends which can be used to fund regular withdrawals or purchase additional units at a reduced price.

The other major market trend has been the downturn in Australian housing prices. Although this varies by capital city it is most keenly being felt and reported, in Sydney and Melbourne. This correction has been flagged for years, with many graphs showing incredible levels of growth and debt, that simply could not continue. The government was well aware of this and put a number of polices in place to try and slowly reduce prices instead of seeing the market collapse. Commentators are predicting a total fall of 20% in Sydney and Melbourne markets, with around 10% of this still to come in 2019.

Tightening credit (i.e. it’s getting harder to borrow money) has been a major factor in why we are seeing these changes. Interest only loans are being converted to principal and interest, three of the big four banks increased their interest rates in September and the banking royal commission has forced banks to better scrutinise mortgage applications.

The Reserve Bank of Australia (RBA) has maintained the cash rate at 1.5% since August 2016 and it was interesting to see the banks increase their rates independent of the RBA. This was done because the banks borrow a portion of their funds from overseas markets and increases to global interest rates have increased bank borrowing costs (and reduced their profit!). Given the housing market correction, we are unlikely to see interest rates rise in the short term and there are some predictions they may even drop in the second half of 2019.

Source: AMP Capital Olive’s Insights 12Dec18, www.commsec.com.au

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