Spring 2019 Market Update


Updated February 14th 2020

Paul Israel

CIB Private Wealth

In this update we examine the market during the first part of the year, the shift in interest rate expectations and why the RBA is cutting interest rates, and key areas of support for the Australian economy



The start of the year has seen a very strong rebound in equity markets. The combination of declining interest rates, policy continuity post the federal election, and a constructive reporting season impacted positively. Overall economic fundamentals remain positive in most major economies, though recent data has become more mixed.


The Reserve Bank of Australia cut the cash rate to a record low of 1.00% in July. The first back to back cuts since 2012. RBA Governor Phillip Lowe noted “we’re not cutting because things are getting worse; we’re cutting because we want things to be better”.The key reason the RBA is cutting interest rates is to stimulate the economy, create more jobs, and increase inflation. The central bank believes the unemployment rate needs to be below 4.5% to push inflation from the current rate of 1.3% up into its 2 to 3% target range. Typically, lower unemployment contributes to
higher inflation.

The RBA previously thought that an unemployment rate of about 5% (currently 5.1%) was low enough for inflation to reach its target.Our base case for a number of years is that we are in a period of structurally lower interest rates, in part due to ageing populations and technology innovation
and disruption.


Sources of support for the economy which should mean that an official recession is unlikely:

  1. Credit tightening starting to ease. Most recently APRA announced that they are removing the 7% serviceability requirement for mortgage lenders. We have already seen APRA lift lending restrictions in December last year, restrictions that were imposed in March 2017. The RBA noted that “conditions in most housing markets remain soft, although there are some tentative signs that prices are now stabilising in Sydney and Melbourne”. A modest turnaround in property prices should help the broader economy.
  2. Public infrastructure spending continues to rise strongly.
  3. Demand for our exports is strong in part due to Chinese stimulus measures. Sharp increases in commodities such as iron ore and gold, has led to upgrades to resource earnings, a record trade surplus, and boosts the federal budget.
  4. Policy stimulus to help, with the Federal Budget providing a combination of tax cuts and increased spending. The good news is that current commodity prices are significantly higher than budget forecasts. For instance Iron Ore is currently over $115 per tonne versus budget forecasts of $55 per tonne. Monthly budget data released in June showed the Federal budget position already materially beating forecasts released in April.

The other favourable development is the low unemployment rate (5.1%). Tax relief will give a lift to household income, and there remains room for further tax cuts. If Australia is not buffeted by offshore events, our natural growth profile (flowing from population growth, tourism, education and commodity export income) will continue to lift the revenue of the government.


Historically periods of low inflation, low interest rates and low unemployment have been very positive for shares. Our preferred exposures include healthcare, infrastructure, technology, overseas
earners, and resources. Please do not hesitate to contact us if you have any queries, or if you would like to discuss your portfolio.

Chart 1 – Official inflation figures have been below the RBA target range for over 4 years

Chart 2 – February 2019 – The trade surplus boomed to a record $4.8 billion

IMPORTANT Information contained in this newsletter is not advice. Clients should not act solely on the basis of material contained in this bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas.The bulletin is issued as a helpful guide to our clients and for their information.