By Andrew Quin

January 21, 2020 | TWD Invest

December 2019 in Review

Economic Developments


  • The Reserve Bank of Australia (RBA), held the Cash rate at a record low of 0.75%. On 3 December the US S&P hit record highs at the end of 2019, as did the US NASDAQ technology index.   Locally, the ASX200 is now trading above the highs last seen at the peak of the boom in 2007. Australian growth is expected to reach 3.00% by 2021. With the market expecting the Cash Rate to be at 0.25% by mid-2020. Australian inflation remains low at 1.70%, below the 2-3% RBA target.
  • There is continued discussion in the market regarding interest rates ultimately being moved to negative by central banks. The significant volume of funds willing to buy negatively yielding bonds in recent years would suggest a significant component of the market is anticipating rates going negative. If this was to occur it would likely be a positive for global stock markets. Another possibility in the 2020s is that the RBA will attempt Quantitative Easing (QE).
  • The next RBA meeting is 4 February 2020.
  • Australian Seasonally adjusted retail sales lifted 0.9% in November 2019 – the strongest growth in two years, well ahead of economist’s expectations for 0.4% growth. This follows retail sales reported in October 2019, being flat. Online retail in Australia still only makes up 6.5% of total retail turnover.
  • Australian GDP Growth is seen below.

  • Australia’s unemployment rate was stable at 5.3%, when last reported in September. 
  • The Australian dollar is trading at 0.6900 to the US dollar. 
  • As we have noted in prior newsletters. We think a significant component of deflationary forces in the global economy is a result of a combination of technological change and globalisation. Post 2008 central bank actions to try to drive increased demand through increased debt accumulation via low interest rates and QE has brought demand forward, which is then creating clear air pockets of weak demand, that is then being addressed by even more extreme monetary policy in a cycle.
  • Into this mix are significant voting blocks, with perceptions that make management of effective economic policy extremely difficult. Thus commonly fiscal and monetary policies are working against each other. An example would be where austerity approaches (fiscal policy) acting to slow economies is working against monetary policy attempting to speed up economies, as seen in parts of the EU. Another example is where the political fallout from an economic slowdown is avoided by increased deficit spending.
  • In its biannual Global Economic Prospects (GEP) report, the World Bank has warned of the risk of a fresh global debt crisis, urging governments and central banks to recognize that historically low interest rates may not be enough to offset another widespread financial meltdown. 
  • On the face of it, such policy miss-match could be seen to be a prelude to a major debt fuelled economic day of reckoning. However, we are inclined to believe that major technology change in the next 10 years will be the primary impactor on the status quo of the global economy.
  • For investors this will create both opportunities and threats. Companies that can correctly implement technology could still have significant upside, while others could see significant parts of their market disappear.
  • We feel the demise of the crude oil industry will become clearly apparent around 2023, as the market underestimates the rate of adoption of electric cars. This will likely see an increase in demand for internal combustion engine (ICE) car servicing and parts, for a period as people hold onto their ICE cars before making the switch to electric cars. The recent listing of the Saudi oil company may be a view towards the outlook for oil assets longer term by the Saudi Government.
  • This is difficult to envisage because the switch away from fossil fuels necessitates renewable production cost trends to continuing to trend downward. If this continues to occur, which is likely, a point will be reached where fossil fuels like coal are no longer cost competitive.  
  • We have noted in other newsletters the shift to electric and automation in the mining industry and expect this to gain momentum and expand mining sector margins.
  • We expect the bulk of manufacturing to shift to production only after an order is received (effectively a reduction in stock product levels) and for 3D printing to increasingly dominate manufacturing.
  • Particularly challenging for investors is the current strongly turbulent political views, many of which will ultimately be proven wrong. In the shorter term the stock market can react to these views, and they can influence consumer demand, meaning their impacts need to be taken into account when making investment decisions.
  • Despite aggressive monetary policy credit demand has recently started to decline, as shown in the chart below. It is possible this will be a driver for additional aggressive monetary policy in Australia in 2020. Particularly if the Chinese economy continues to slow.

Commodity Prices

  • The gold price (US$1548/oz.) up about US$48 over the past month, following rising tensions between Iran and the US. 
  • Lithium carbonate currently sells for approximately US$8,750/t. Prices are expected to lift by 2025. China will not make significant cuts to subsidies for new energy vehicles (NEV) in 2020, signalling that its policy will remain relatively stable, state media recently quoted the country’s industry ministry as saying.
  • Nickel prices weakened over the past month following the lift in prices due to the Indonesian nickel export ban, trading slightly higher to U$14,000/t from US$13,416/t in the prior month. 
  • WTI Crude oil is currently quoted at US$59.50/bbl up about US$0.30 from the start of the prior month. We continue to see conventional energy investment as at risk, as alternatives gain in both environmental support and price competitiveness, however it is likely currently too early to exit the sector.

Bond Markets:

  • The Australian 10-year bond yield is 1.24% from 1.29% at the start of the prior month. The 2-year yield is 0.80% and the 5-year yield is 0.99%. 


  • The US 10-year bond yield is 1.83%. We do not anticipate a US recession. We continue to see public markets as likely under valuing technological disrupting companies set to take over large parts of traditional industries over the next 20 years. Passive investors are currently likely under estimating the risks to traditional industry disruption. 
  • At the same time it will be important for investors to not act too early as disruptive technologies take time. As an example the switch in the US from horses to the automobiles took approximately 13 years to reach 80% saturation. 
  • The average lifespan in the 1920s of a company on the S&P500 was 67 years, today it is 15 years. 88% of US Fortune 500 companies in 1955 no longer exist. 
  • This balancing of technology disruption with the timing of impact will be one of the key investment challenges in the next 10-20 years.
  • The Federal Open Market Committee Next meets 28-29 January. The current Federal Funds rate is 1.50% to 1.75%. With the Fed likely to hold rates for a period, with views considerably mixed on whether there will be a lift in US interest rates in 2020. 
  • The US President Donald Trump, announced that the Phase 1 trade deal with China had been signed on 15 January 2020, and a full agreement could be signed “shortly thereafter.”
  • The US added 145,000 jobs in December 2019 (Consensus; 160,000). The US unemployment rate held at 3.5%, in line with consensus remaining at a 50-year low.
  • The US Presidential Election is taking place on 3 November 2020, we expect US President Trump to win a second term. If President Trump was to lose the election, this would likely be a negative for the stock market.
  • S&P 500 earnings estimates are Fourth quarter: Down 0.6%, First quarter: Up 6.0% and Second Quarter: Up 7.2%.
  • On 1 January, 2019, stocks were at 13.9 times forward earnings for the S&P 500, below the historic norm of 16. On 1 January, 2020, it was at 18, today it is 18.4, the higher end of its range in the last 20 years.
  • In its latest Global Economic Prospects report, the World Bank took 0.2% points off of growth for both years, with the 2019 global economic growth forecast at 2.4% and 2020 at 2.5%.
  • Growth in the US, the Eurozone and Japan is forecast to decline slightly to 1.4% in 2020 from 1.6% in 2019 — due to continued softness in manufacturing and the negative effects of US tariffs and retaliatory measures. 
  • Emerging market economies are expected to see a pickup in growth to 4.3% in 2020 from 4.1% in 2019, although these are both a half percentage point lower than forecasts made in June.
  • The German 10-year bond yield is -0.20% from -0.29% at the start of last month. 
  • China’s debt as a percentage of GDP has lifted to about 260%, with the country’s growth rate forecast to slide further, to 5.7%, in 2020.
  • Officially, China is targeting 6% GDP growth for 2020. China accounts for about 16% of global Gross Domestic Product.  Australian exports to China have recently exceeded 30% of total exports.


Market Movements

Australian Equities:

  • The ASX200 Index lifted 3.23% over the last 25 trading days. The ASX200 chart is shown below.

Source: Metastock

  • The ten best stock performers on the ASX200 over the last 25 trading days were SYRAH RESOURCES ORDINARY [SYR] 49.31%, OROCOBRE LIMITED ORDINARY [ORE] 40.49%, CYBG PLC CDI 1:1 FOREXEMPT LSE [CYB] 38.42%, GALAXY RESOURCES ORDINARY [GXY] 28.88%
  • The poorest performing stocks were SARACEN MINERAL [SAR] -17.78%, LYNAS CORPORATION [LYC] -18%, BANK OF QUEENSLAND [BOQ] -18.23%, WHITEHAVEN COAL ORDINARY [WHC] -19.32%, AUSTRALIAN MINES LTD [AUZ]-20%, PILBARA MIN LTD ORDINARY [PLS] -20.28%, SMARTGRP [SIQ] -20.70%, SPEEDCAST [SDA] -26.80%, G8 EDUCATION [GEM] -27.62%, and ISENTIA [ISD] -35.52%.

Global Equities:

  • The broad global equities index (MSCI ACWI) delivered a 22.65% return over the past year including approx. 0.97% in the past month.  The US S&P500 lifted approx. 1.07% in the past month, and is up 28.3% over the past 12 months, the STOXX Europe 600 Index was up 0.48% over the past month, and was up 20.14% over the last 12 months. The Shanghai stock index was up approx. 1.39% over the past month and was up 21.98% over the last 12 months. 

Looking Ahead

  • While global debt remains a risk, we believe the public markets are underestimating the potential of technological disruption over the next 10-20 years and the impact this will have on traditional industries. This presents both threats and opportunities in investment markets.
  • We expect technological change to be a primary driver of deflationary pressures, with this combined with high debt levels likely to see interest rates remain at low levels. 
  • The market is now more mixed on the Australian and US interest rate outlook in 2020. 
  • The outlook is for the global economy is to remain lack lustre according to forward estimates.  
  • We think the Australian and US stock markets will maintain their positive outlook as US company earnings lift from their weaker 2019 performance and President Trump wins a second term. We maintain our conservative positioning recommendation based primarily on technological disruption risk, Iran tensions, slowing Chinese growth, and US election uncertainty.

Words by Andrew Quin.