The real threat to your wealth in 2019

Wednesday, 12 December 2018
Melbourne, Australia
By Bernd Struben

  • Misunderstood and overhyped
  • Who’ll stop this slide?
  • Keeping well ahead of the pack

With only one and a half weeks left before the Christmas holiday break, we turn our radar to the year ahead.

Like you, we hope the returns from Aussie stocks in 2019 look more like 2017 than they have this year.

In 2017, the ASX 200 gained just under 5.5%. That’s hardly shooting the lights out. But in a low inflation environment — 1.9% in 2017 — and once you add in dividends, it’s not bad for the overall index.

In either case, it handily beats the 8.0% year-to-date loss the ASX 200 was sitting on at market close yesterday:

chart image

Source: Google Finance
Click to enlarge

At time of writing the ASX 200 is in the black in intraday trading, up 1.15%.

That’s heading in the right direction for a change. Though with only seven full trading days left before Christmas, we’ll need one heck of a Santa Rally to end the year close to even.

But that’s all 2018.

What about the year ahead?

We’ll get back to that right after a look at the markets…


Overnight, the Dow Jones Industrial Average closed down 53.02 points, or 0.22%.

The S&P 500 fell 0.94 points, or 0.04%.

In Europe the Euro Stoxx 50 index finished up 38.33 points, or 1.27%. Meanwhile, the FTSE 100 gained 1.27%, and Germany’s DAX closed up 158.44 points, or 1.49%.

In Asian markets, Japan’s Nikkei 225 is up 413.75 points, or 1.96%. China’s CSI 300 is up 0.16%.

In Australia, the S&P/ASX 200 is up 63.92 points, or 1.15%.

On the commodities markets, West Texas Intermediate crude oil is US$52.03 per barrel. Brent crude is US$60.20 per barrel.

Turning to gold, the yellow metal is trading for US$1,243.57 (AU$1,724.31) per troy ounce. Silver is US$14.56 (AU$20.19) per troy ounce.

One bitcoin is worth US$3,370.76.

The Aussie dollar is worth 72.12 US cents.

Misunderstood and overhyped

Before getting to what I believe is the greatest threat facing Aussie investors in 2019, let’s address a risk that’s broadly misunderstood and overhyped by the mainstream financial press.

And that is the likelihood of the US-China trade dispute erupting into a full-scale trade war. One which will disrupt global trade and take a bite out of global growth.

Trump only needs to mouth the word ‘tariff’ to see pundits line up to declare trade negotiations dead in the water. These fears are splashed across the headlines. Investors get spooked. And markets fall.

Take the arrest of Huawei Technologies’ Chief Financial Officer Meng Wanzhou, for example.

You’re probably familiar with the case. And the doom and gloom stories that followed.

Meng was arrested on 1 December in Vancouver Canada at the request of the US government. She’s charged with fraud for allegedly covering up corporate dealings with Iran. Something strictly verboten under renewed US sanctions.

Rather awkwardly, her arrest came on the same day that Trump and China’s Xi Jinping had dinner in Buenos Aires. The same day the two leaders announced positive progress towards ending the trade disputes.

There’s been no shortage of fear that her arrest would torpedo the trade talks. Going hand in hand with Trump’s I’m a ‘tariff man’ comments coming just days after his meeting with Xi, analysts were quick to stoke investor angst. And investors rushed for the exits.

Now there are good reasons to tread cautiously in the stock markets in 2019. But I’ll go on record, again, to say the prospect of a full-blown trade war should not be one of them.

Both Trump and Xi have tremendous incentives to reach a new agreement.

Among other things, Trump needs Xi to help him bring North Korea into line. Then Trump can be the man to deliver peace to the Korean Peninsula. (Don’t for a second believe he doesn’t have aspirations for the Nobel Peace Prize.) Politically, Trump also needs to be able to walk away saying he’s the president who finally ‘levelled the playing field’ with China.

As for Xi, he simply cannot afford to have China’s growth plans derailed. Any significant uptick in the unemployment rate in China’s rapidly urbanising society could spell big trouble. Not just for Xi, but for the Communist Party as well.

With that in mind, the following headline from Bloomberg should come as little surprise, ‘China Move to Cut Duties on U.S. Imports Lifts Auto Stocks’. The article continues:

Progress toward easing the steep tariffs China imposed on U.S. vehicle imports this year lifted carmaker stocks across the globe, as investors wagered on a thawing of tensions that have damaged the world’s biggest automotive market…

The move by China would reduce tariffs on cars made in the U.S. to 15 percent from the current 40 percent, in line with what other countries pay, the people said. The step hasn’t been finalized and could change.’

Trump, for one, wasted little time taking to Twitter:

chart image

Source: Twitter
Click to enlarge

As for the fallout over Meng’s arrest? Trump and Xi know there’s a lot more at stake. And China has confirmed it will go ahead with trade talks.

From The Australian:

“Both sides exchanged views on pushing forward the next step of the timetable and a road map for consensus made during the leadership meeting,” China’s ­Department of Commerce said…

“We still have to continue the trade talks,” Wu Xinbo, the director of the Centre for American Studies at Fudan University told the South China Morning Post yesterday.

“Meng’s arrest is an individual case. Trade is the bigger issue.”

In the meantime, a Canadian court just released Meng on C$10 million (AU$10.3 million) bail. And I wouldn’t be at all surprised to see Trump step in to set her free. Very possibly donning his ‘good cop’ persona in time for Christmas as a goodwill gesture in the trade negotiations.

Her arrest and incarceration, after all, have already sent the intended message.

And as Bloomberg reports, ‘Trump separately told Reuters that he would consider intervening in the Huawei case if it served national security and helped with a China trade deal.

Of course, it will help with the trade deal! That must be music to Meng’s ears.

In the meantime, it’s the Canadians taking the heat. Former Canadian diplomat Michael Kovrig was detained in China while visiting Beijing. But I expect he too will be released shortly.

And by northern spring 2019, current fears of a global trade war will have been proven unfounded.

Who’ll stop this slide?

So if a trade war knocking the stuffing out of China’s economy isn’t the biggest risk for Aussie investors next year, what is?

I’m sorry to say you might be sitting inside the answer. That is if you’re reading this in the comfort of your home. Even more so if your house happens to be in one of the capital city regions.

No doubt you’re aware that average home prices have been heading lower this year.

The price drop in Sydney is already the worst in 30 years.

From Bloomberg:

Sydney’s property market slump has reached a new milestone, with values falling further than the late 1980s when Australia was on the cusp of entering its last recession.

Average Sydney home values have fallen 10.1 percent since their 2017 peak, CoreLogic Inc.’s head of research Tim Lawless said Tuesday, citing data as of Dec. 7. That surpasses the top-to-bottom decline of 9.6 percent recorded between 1989 and 1991.

Now prices in the capital cities are still well above where they were six years ago. In Sydney, for example, average prices are still up 60% from 2012. This will help cushion the banks from further potential defaults.

But it will come as little comfort to homeowners and investors who bought new property this year. And it will certainly be foremost in mind to prospective buyers sitting on the sidelines watching prices continue to slide.

With that in mind the risks of the housing selloff ramping up in 2019 should not be dismissed.

Among other lurking risks, there’s the swathe of interest only loans that are set to switch over to interest plus principle repayments. Some 900,000 interest only mortgages, to be precise.

As MSN reports:

An estimated 900,00 Australian households could fall into mortgage stress over the next two years, as a $295 billion mortgage bomb begins to unravel.

According to new research from, 42 percent of home loans taken out in 2014-2015 were interest-only loans…

The latest data from Digital Finance Analytics revealed more than one million Australian households, 30.7 percent, with an owner-occupied home loan are experiencing mortgage stress.’

That’s 30.7% of home owners having a hard time making their mortgage payments before 900,000 interest only loans issued five years ago begin to demand some of the principle back.

This would be onerous even in an environment of rising house prices. But with prices falling, I expect it could see more for sale signs pop up…and fewer eager buyers lining up for new oversized mortgages.

In its latest report, the Organisation for Economic Co-operation and Development also sounded the alarm. As Bloomberg reports:

Soft landings in housing markets are rare and Australia should be ready to respond to the risk of a significant price dive, the OECD said…

“Risk of an overshoot in the price correction — a hard landing — remains,” the Organisation for Economic Co-operation and Development said in its report. “Estimates of housing valuation are highly uncertain” and “past OECD work has found soft landings are rare.”

Australia’s house-price decline is centered on Sydney and Melbourne and reflects credit curbs and increasingly nervous buyers. But unusually, the drop is happening against a backdrop of record-low interest rates and strong hiring; whereas historically, property downturns occurred when rates were high, growth was slowing and unemployment rising.

The biggest concern the OECD notes, in my opinion, is that house prices are falling in the face of record low interest rates. With rates already at a negligible 1.5%, the RBA doesn’t have much fire power at its disposal to stop spiralling property prices.

And if property prices keep heading down, there’s the real risk of a negative feedback loop from something known as the ‘negative wealth effect’.

In simple terms, as homeowners and investors see the value of their properties decline, they’re likely to cut back on all sorts of other consumption.

With consumer spending making up some 60% of Australia’s economy, even a small cutback could have a big impact on economic growth. This, in turn, could see decreased demand for houses, which then…

Well, you get the idea.

So what’s an Aussie investor to do?

Stay informed. Consider increasing your allocation of cash and precious metals. And think carefully before buying your dream home or that must-have investment property.

Keeping well ahead of the pack

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‘Premier: NSW “Burdened with Ballooning Population Growth”’

The realisation that Australia has been growing too rapidly for too long is beginning to sink in at the highest levels.

Yes, Australia is a nation historically built on immigration. But times change.

Yes, migration adds to the gross domestic output of the economy, although it doesn’t necessarily make individual Aussies any better off…

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