12 Dec Market Commentary – December 2019
Video – Market Trends: December 2019
David Bassanese shares the last market wrap up for 2019. In his video he discusses what influenced the markets in 2019, what how things are likely to shape up moving into 2020.
Key Global Trends – optimism prevails
Ongoing hopes of a US-China trade deal and signs of stabilisation in the two-year global growth slowdown allowed risk-on investor sentiment to prevail during November – with global equities and bond yields moving higher and gold prices pushing lower. The $US also remained generally firm, given growing signs from the Federal Reserve that it does not plan to cut interest rates further.
Major trends across the four major markets we track above remained unchanged last month, though if risk-on sentiment prevails, it is likely that the trend in global bond yields will soon turn up and that for gold down. Under this scenario, the uptrend in equities would also remain intact though the outlook for the $US would be mixed.
Global Equities – Fundamentals Update
As seen in the chart pack below, the uptrend in global equities so far this year continues to be led by PE valuations rather than earnings, with the latter in turn supported by the decline in bond yields.
That said, the drivers of global equities could be changing as risk-sentiment improves: there has been a very modest rebound in forward earnings in recent months, while bond yields have moved higher. The rebound in equity prices, however, is still outstripping earnings, such that as at end-November, the global forward PE ratio rose further, from 15.3 to 15.8 – compared to a 10-year average of 13.9. Global bond yields edged up to 1.41% from 1.34%, which is still below their 10-year average of 1.94%. As a result, the global equity-to bond yield differential eased down to 4.9% from 5.2%, though remains only moderately below its 10-year average of 5.4%.
Over recent years, the highest month-end PE ratio reached by global equities has been around 16 to 16.5, or around 3% above current levels.
For global equities to move higher in coming months it will be important for global bond yields to remain relatively low and/or the downgrade to earnings growth expectations to level out. As it is, the Bloomberg consensus estimate of analyst 2021 earnings expectations still implies 10% growth in forward earnings over the coming year.
Australian Equity Trends
Despite weakness among financial stocks, the S&P/ASX 200 posted a good performance in November, reflecting strength across a range of other sectors such as mining, health care, technology, energy and telecommunications. An improving global growth outlook, weaker $A and very low local interest rates continue to support local stocks – while the financials (i.e. banks) remain plagued by margin squeeze due to lower local interest rates and ongoing reputational damage as more bad practices come to light. Due to ongoing soft economic data and dovish signals from the Reserve Bank, local bond yields dropped last month – bucking the global move higher in yields.
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