Around 12 months ago, I shared my 10 predictions for FY18. These included a peak for the housing market, struggling retail stocks, and global macroeconomic strength. It was great to see that a lot of these predictions proved true. With FY18 now over, Livewire have asked for my predictions for FY19.
1. Global economic growth continues to accelerate
We anticipate global growth to remain at above average levels, primarily driven by the US, which is experiencing mid-to-late cycle conditions. We expect the US central banks to increase interest rates four times in 2018, coupled with corporate tax cuts from 35% to 21% is sure to supercharge US growth in the short term. Global macro-economic conditions are the best they have been since the global financial crisis and for the time being, we expect this will continue.
2. Traditional media sector to surpass digital advertising
For the first time in a decade we are seeing the shift away from digital advertising spend back towards traditional advertising on TV and radio. The digital media market is maturing after many years of double-digit growth and many advertising agencies are now finding it hard to accurately measure returns on marketing expenditure. As a result, advertisers are beginning to move from the likes of Facebook and YouTube back towards free-to-air television and radio advertising. We believe free-to-air TV companies including Nine Entertainment Group (ASX: NEC) and Seven West Media (ASX: SWM) and radio stations such as Macquarie Radio (ASX: MRN) have the scope to outperform over the 2019 financial year.
3. Retail sector bounces back
Six months ago, fears about Amazon’s impending arrival in Australia weighed heavily on retail companies, with many heavily sold off in lead up to the launch. Although Amazon’s arrival was underwhelming and below expectations, the share prices of these companies in some cases have yet to recover. With the Australian economy and consumer in good health, we believe consumer discretionary stocks can outperform in FY2019 based on their historically low price to earnings multiples.
4. Housing market in for soft landing
While there are fears that the housing market will continue to fall, we believe house prices will be flat in Sydney and Melbourne for the next three years, primarily driven by the growing population and an undersupply of homes. As banks continue to tighten their lending standards, we expect this will supress house price growth over the short-to-medium term.
5. Elevated merger and acquisition activity in Australia
With corporate balance sheets currently in the best shape they have been in a decade, private equity firms are in acquisition mode as opposed to divestment mode. With the global macro-economic environment continuing to accelerate, this is generally supportive of high levels of merger and acquisition activity. The low Australian dollar makes it more attractive overseas buyers, as seen with the recent takeover proposal for Sirtex Medical (ASX: SRX) recently.
6. Outcome of the election
Although we can’t predict the election outcome, which must happen before May 2019, according to the polls Labor are the favourites to win. Based on several policies submitted by the Labor government this year including changes to the current dividend imputation system and negative gearing, from an investment standpoint these will suppress economic growth and would be negative for the share market.
7. Banks will outperform
For the 2018 financial year the banking sector underperformed, driven by the Royal Commission and slowing growth in Australia. On a price to book basis the banking sector is the cheapest it’s been in many years and on a price to earnings basis it is inexpensive. We expect dividends will remain flat, providing scope for the banks to outperform the overall market.
8. The Australian market will continue to rise
The Australian market will rise in FY2019, albeit very marginally. We are towards the end of this cycle and are currently in the later stages of the second-longest bull market in the United States history.
9. Interest rates remain on hold
We expect Australian interest rates could be on hold for a prolonged period. While the direction of interest rates is unclear, expectations are that the next move will be up. With no wage inflation and no clear catalyst that will see domestic economic growth surprise on the upside in short-to-medium term, interest rates should remain on hold. However, if we continue to see sluggish domestic growth a rate cut may be on the horizon.
10. Price to earnings ratios to contract
In FY2019 we think price-to-earnings ratios could contract across the market. The 2018 financial year saw huge levels of PE expansion, particularly in technology sector. We think companies like WiseTech (ASX: WTC) and Altium (ASX: ALU) could see PE’s contract over the next 12-months based on the global interest rate outlook.
Wilson Asset Management
Source: Live Wire Markets