We have seen a substantial market correction in Australian and International shares since September 2018. However, economists believe that a near–term recession will be avoided.
In short, economic growth should shift down but not out. From an asset return standpoint, Vanguard foresees a ten-year outlook for a diversified portfolio in the 4%-6% range, representing a modest improvement over 2018.
“While market volatility over the past two-to-three months has some investors overly cautious going into 2019, our outlook, while still guarded for the near-term, shows optimism for long-term investors as we move into the next year,” said Joseph Davis, Ph.D, Vanguard’s Global Chief Economist and head of Vanguard’s Investment Strategy Group. Whilst ROPAN Financial Services Group advise that many longer-term clients are using the current correction as an opportunity to top up their portfolio’s on market weakness. Financial planner, Melissa Murphy advised that many clients had also re-weighted their portfolio towards cash and fixed interest markets also leading up to the market movements.
Despite several factors pointing to a higher risk of a recession in 2019, Vanguard’s analysis on the fundamentals and historical drivers causing recessions concludes that the more likely scenario is a slowdown in growth, led by the U.S. and China. However, the expected easing of global growth over the next two years is charged with economic and market risks. Potential scenarios include the possibility of a severe deceleration of China’s economy, a policy mistake by the Fed (Federal Reserve System) as it raises rates further into restrictive territory, trade tensions, and other geopolitical and policy uncertainties.
“Investors should be prepared for market volatility to persist, however, with Australia’s labour market now in a similar position to that of the U.S. a year ago, so upward surprises to wages could quickly change market expectations in a similar fashion to what we saw in the U.S. in February 2018.
“The Reserve Bank of Australia continues to face a dilemma between an ever-tightening labour market and the combination of low inflation and concerns over household debt. There is a chance the RBA will move sooner than the market expects, however, if the labour market tightness feeds into inflation pressure.”
Continued interest rate increases have positively benefited Vanguard’s outlook for fixed income markets versus previous reports. Over the next 10 years, investors can expect to see global fixed income returns in the 2%-4% range. Non-Australian bond investors could expect returns in the same range, and while similar to that of Australian bonds, would still provide positive diversification benefits in a balanced portfolio.
From a regional perspective, ROPAN believes that now is a good time to prudently invest in your business. Having a plan in place to ensure that the investment will add to longer-term client or customer outcomes, growth in revenue and ultimately positive growing profit outcomes. An example being one of ROPAN’s private equity partners, Nature One Dairy, recently introducing organic baby formula to its product line and marketing through exclusive agreements with Priceline Australia.
This article has been caringly penned by the team at ROPAN Financial Services. As generous supporters of Gippslandia since our inception, ROPAN are committed to providing advice that benefits all Gippslanders.
Source: Vanguard Australia.