Saxo Bank has warned that Australia’s luck may be running out as China’s economic slowdown adds to a growing list of challenges for the domestic economy.
Saxo Bank’s Australian markets strategist Eleanor Creagh said that while Australia has been recession-free since the early 1990s, it seems the country’s luck may be drying up.
“Investors in Australia face a raft of domestic problems in addition to the myriad global troubles,” Ms Creagh said.
“The deceleration in the housing market is gaining pace, and a potential change of leadership brings uncertainty with federal elections due to be held by May 2019. Opinion polls indicate a Labour government is increasingly likely. This brings an element of policy uncertainty, with proposals to restrict negative gearing, cap private health insurance premium increases and abolish cash rebates when franking credits are greater than the taxes paid.
“Throw into this mix China’s slowing growth momentum, and the outlook for the Aussie market this year should also be viewed with a degree of caution.”
Ms Creagh said the recent strength in the labour market may oﬀset the negative wealth eﬀect and fall in consumer spending precipitated by the sliding housing market.
“At least that is what the RBA is relying on,” she said. “But the risks are mounting, and the Australian economy has run out of steam over the last six months, as evidenced in the third-quarter 2018 GDP report where annual growth slowed to 2.8 per cent from 3.1 per cent.”
Heading into the first quarter of 2019, Saxo Bank is focusing on wealth preservation and playing defence with a conservative allocation to risk assets unless global policymakers capitulate and move to boost liquidity.
“Based purely on where we are in the current economic cycle, the risk-reward ratio for equity investment is skewed to the downside, while investors can secure an almost 2 to 3 per cent return over the year in Treasuries,” Ms Creagh said.
“The second half of 2019 could be diﬀerent if we see the global economic slowdown lead policymakers towards stimulus in a bid to catch the dip. A few months ago, this scenario seemed far-fetched, but recent messages from the Fed indicate a more ﬂexible policy approach and that a pause in QT could be in the pipeline if deemed necessary.”
Ms Creagh also expressed caution towards Aussie banks, pointing to the cooling housing market and proposed tax policy changes in the event of a Labor government.
The latest statistics show that declines in the property market are gaining pace, with the CoreLogic December home value index down 1.1 per cent month-on-month.
“The housing market is struggling, and weekly auction clearance rates continue to deteriorate, pointing to further declines ahead,” Ms Creagh said.
“The epicentre of the housing market downturn is in Sydney where an 11.1 per cent drop in prices since the peak in July 2017 is outpacing the declines seen in the late 1980s during the last recession.”
“Looking forward into 2019, it is likely that the East Coast housing market will continue to slide as credit conditions continue to tighten with the banks’ self-regulating, thus weighing on the growth outlook for the year ahead. Banks will continue to tighten credit standards and serviceability measures in the wake of the banking royal commission.
“Tougher credit checks and verification of borrower income and expenses are in full swing already.”