A Strong Start to the Year
After large falls in share markets in the final quarter of 2018, share markets have bounced back strongly in the first quarter of 2019. Australian shares rose 11.97%, Global Developed market shares are increased by 12.50% and Emerging Markets are up 17.22%. This renewed optimism appears to be triggered by the US Federal Reserve signalling a slower rate of interest rate rises than had previously been indicated.
Despite the renewed optimism that’s provided an excellent start to the year, there are reasons to remain cautious. Several indicators, including global trade numbers and interest rate forecasts, are hinting at an increased probability of a global economic recession. However, history has shown that it can take several years for a recession to eventuate after the warning lights start flashing. This makes us reluctant to drastically reduce exposure to share markets. Risks of recession are also reduced by China’s current economic stimulus and central banks backing off on interest rate rises.
The global economic slowdown has arrived at a challenging time for Australia with weak labour and property markets. A weakening property market spills over into reduced employment in the building and construction sectors and reduces the willingness of households to spend off the back of increased economic uncertainty. On a positive note, China’s stimulus measures and Government infrastructure projects are supportive of the domestic economy.
We took advantage of the weakness in share markets in the final quarter of last year by increasing the allocation to Australian and International shares in Cooee’s model portfolios in early January. The changes recommended in early April moved the portfolios back to a more neutral weighting between growth and defensive assets, albeit with increased exposure to international markets rather than Australia due to our concerns for the domestic economy. Whilst cash and fixed income investments are currently providing low returns, they provide us with a source of funds than can be reinvested into equity markets if more attractive buying opportunities are presented.