Written by Mark Thomas
28 January, 2020
Many commentators are still talking about anaemic growth in 2020 with a focus on low wage growth in Australia and our technical recession in 2019. In fact some economists think a recession is still a one in three chance. While most think economic growth in 2020 will be better than 2019, they also think it wont be a lot better. We beg to differ.
Have you heard the term “listen to the markets”? Well they are telling us something right now. They are suggesting global economic growth will rise in 2020 above expectations, benefiting Australian shares and property.
Looking at the emerging trend in global economic growth, we see a pick up in 2020 particularly for the emerging world, including Australia. Like it or not, Australia exports commodities to the world at the rate of 80-100 percent of our total exports. Perhaps this is why our government is dragging the chain on transitioning to a climate friendly status. Our exports rely heavily on mineral and agricultural industries as do many jobs and families in Australia.
As we discussed last week a number of central banks have dropped interest rates and global growth looks like it will respond.
This will benefit growth assets like property, shares (particularly in emerging economies), and commodity prices as demand from growth shifts up a gear.
These trends will be more pronounced for the emerging world economies as many of these economies rely on commodity exports for their income.
Source: United Nations
The major exception to this is China that has only 0-20 percent of its exports dependent on commodities. Most of Africa, Australia, South America, Eastern Europe and Asia rely on exports of commodities to balance their external books.
If we look a bit deeper into these export markets we see energy, agricultural and mineral exporting countries are 54 percent of the world by the number of countries.
So it is understandable that the link between emerging markets, commodities and an uptick in global economic growth will be positive for share markets even if it is not good for the environment. Some fund managers are boycotting companies with high allocations to these commodities. BlackRock, the world’s largest fund manger, is the most recent to take a stand. However, BlackRock will only shift away from commodity producing companies for 30 percent percent of its businesses assets. The other 70 percent are in index funds that simply replicate the share market indices of the world, irrespective of the allocation to commodity producing companies.
The following charts were highlighted in a recent Livewire report. They all say the same thing to me – that growth is picking up globally and the markets are telling us so.
The proviso is that these markets are not too expensive with all this future already built into the current price. As it turns out they are priced around the average of the last ten years so it should not be a handbrake.
With this in mind these charts tell a very positive story. The one question mark… Will US/China trade talks falter? This is an unknown at this stage, but as discussed last week the politics are positive as both sides want a result.
Emerging economy central banks have eased monetary policy quite aggressively, similar to their reaction post the GFC in 2010. With economic growth up, but not really strong, there will be excess liquidity that will drive shares higher.
Commodity markets have anticipated an upturn with strong price momentum in many commodity markets i.e. almost 80 percent of markets having positive annual growth with a likelihood of a breakout upwards on the cards.
Value stocks are normally very cyclical in nature (think resources, building materials, car manufacturers and airlines) and should do better than growth companies (think pioneer industries like tech companies, battery materials, cannnabis and alternate energy) as they did in the beginning of the last decade when economic growth rebounded. This is not to say that growth companies will not do well, but in a cyclical upswing value stocks tend to perform better.
Please consult your advisor for specific recommendations. This general advice does not take into account the client’s objectives, financial situation or needs as we do not and cannot provide personal advice. Any views written about in this article are the views of the author who has no holdings in those companies or investments mentioned in this article.