Investors come in two varieties: bulls and bears. As we drive headlong into 2019, there could be cases made for both — here’s why.

Reasons why investors should be optimistic

The trade war

The US/China trade war has a way to run, and Australian investors could profit in either case.

If the trade war is resolved it is likely Australian markets will follow the U.S. markets on a bull run that would eventuate. If it continues, Australia could be in a position to gain from a China seeking to position itself as a champion of free trade.

Investors looking for a industry safe from the strife should look at iron ore miners like BHP, Rio Tinto and Fortescue Metals — they gained even when the market slumped 14 percent in the last four months of 2018.

Low interest rates

Interest rates remain at historic lows — and there are few clues that the Reserve Bank of Australia will seek to raise them any time soon.

In fact some economists, led by AMP’s Shane Oliver, are predicting that interest rates will remain on hold for the entire year or if they will rise this year, not until the fourth quarter. In fact in recent days, the Reserve Bank have given indication rates may even go down if wage growth continues to be slow.

That means cheap access to credit for investors to potentially invest in the share market.

Less political instability

The back-stabbing and knifing should calm down in 2019 given there’s an election around the corner.

If the Liberals retain government, there will be a compelling reason to stick with Scott Morrison. If Labor gets in, there will be very little reason to knife Bill Shorten.

Of course even if Killing Seasons no longer arrive in Canberra, there is always the risk of backlashes from the public against unpopular decisions even if they are right for the economy.

The Financial Services Royal Commission has finally ended

Already reforms have been made to the banking sector but with the ending of the commission, the economy and the banks will be able to move on from months of being in the public spotlight over their past conduct.

Already changes have been made as a result of the Royal Commission, most pertinent credit tightening and all the major banks have promised their culture has been turned around so that misconduct will not repeat.

The labour market is booming

Unemployment is at its lowest level in nearly seven years (at the time of writing), mainly thanks to jobs being created. In November nearly twice as many jobs were created as economists expected.

Furthermore, it is not the resource-rich states leading the nation.

The lowest unemployment rates were in New South Wales and Victoria with 4.4 percent and 4.6 percent respectively, and the ACT’s rate was lower still at 3.4 percent.

Economists anticipate the trends will continue in 2019 although it remains to be seen if these will translate into higher wage growth.

 

Reasons why investors should run for the hills

The housing market decline

After housing prices surged in capital cities by as much as 80 percent between 2012 and 2017, they are now declining all across the capital cities.

The last time Australia had a property downturn this significant, nearly three decades ago, Melbourne took nearly a decade to recover.

It is arguable the fall is merely a correction, as people who bought before 2012 will likely still be ahead.

Credit crunch

While interest rates may be low, the barriers to borrowing will be higher and the amount investors can borrow lower thanks to the Financial Services Royal Commission.

It has been estimated that the average amount a household can borrow has gone down by 20 percent.

Of course, banks should not be lending to people who cannot make the repayments.

Yet there is concern screening will affect first home buyers as well as existing owners seeking to refinance their property, and this could hurt the housing market just as much as rising unemployment or a recession.

Chinese diplomacy

While Australia’s relations with China are just a touch warmer than the relationship between the US and China, there are still some warning signs in the relationship.

Regulators are perceived to be targeting Chinese companies in Australia, with tightening of political donation and interference laws. Half a dozen Chinese companies were delisted in 2018 and ASIC warned it could take a harder stance against companies it perceived were not abiding by listing rules.

Whilst no one is specifically targeting Chinese companies, there is the risk a high proportion of companies caught out will be Chinese and if the Chinese government retaliates, economic relations could suffer.

Slowing growth

An end to Australia’s recession-free spell of nearly three decades is unlikely to end in 2019, but a slowdown could be on the cards.

The most recent GDP figure was 2.8 percent growth in the September quarter, which was the slowest in two years.

Perhaps pessimism over 2.8% growth rates is more envy of developing nations’ high growth rates, especially China and India. However as those nations have demonstrated, higher growth does not mean a more stable economy.

The federal election

Irrespective of investors’ personal political views, they will often be reluctant to invest until they know the direction the economy is heading in, particularly when the major parties offer different visions for the economy.

The last time the Labor party won office back from the Coalition, the ASX slid 6 percent  during the election campaign as the Howard government attempted to instil fear into the public that they were economically inexperienced and anti-business.

However, the market regained almost all the ground lost in the two and a half weeks after the election.

 

This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.