Australian equities consolidated their strong gains from the first two months of the year with the ASX 200 index rising 0.73% in March. The MSCI world index (AU) was up 1.47%.

There were lots of headlines over the last week about the IMF downgrading its global growth forecasts to 3.3% for this year from 3.5% - but it’s really just catching up to last year’s growth slowdown which was reflected in last year’s share market falls. So, while the IMF headlines caused a one-day blip in markets its nothing new. Particularly with central banks already having swung back to being dovish and signs emerging that global growth may be bottoming and starting to improve. But from a big picture sense the return to a downgrade cycle for global growth forecasts after a year or so of upgrades around 2017 provides a reminder that we are still in the constrained growth/low inflation/low rate world that we have been in since the GFC.
Source: IMF, AMP Capital
The great central bank retreat to dovishness continues. The minutes from the Fed’s last meeting are consistent with it remaining on hold and bringing quantitative tightening to a tapered end this year. At its meeting in the last week the European Central Bank was dovish, formally considering making its negative interest rate on bank deposits less onerous for the banks and with President Draghi erring on the side of doing more rather than less to stimulate growth. With Chinese monetary policy remaining easy it’s clear that one of the big concerns for markets last year – ie that central bank policy would be too tight – remains in retreat for now.
The start of the Australian Federal election campaign ahead of the May 18 election has ushered in a period of economic policy uncertainty for investors. Elections normally see a bit of market nervousness but with a Labor Government promising a very different approach to economic policy than the Coalition involving higher taxes, larger government and more intervention in the economy the May election presents a starker choice than has been the case since elections back in the 1970s and so suggests greater uncertainty for investors than normal around elections.
The RBA’s latest Financial Stability Review highlighted the risks around global growth, high household debt, the housing slowdown and bank culture but seemed reasonably confident that the financial system will weather these risks. In particular it noted improved lending standards, stress tests indicating banks have sufficient capital to withstand a 30% or greater fall in house prices and that even in WA where house prices have fallen nearly 20% and unemployment has increased by 3%, mortgage arrears remain relatively low. Overall, the Review looks to be consistent with the RBA’s neutral bias on interest rates for now.
Are prospects for rate cuts fading? Somewhat better economic data lately, tax cuts for low and middle income earners regardless of who wins the election and ongoing RBA optimism about the economy picking up have seen rate cut expectations fade a little bit. 
Share markets – globally and in Australia - have run hard and fast from their December lows and are vulnerable to a short-term pullback. But valuations are okay, global growth is expected to improve into the second half of the year, monetary and fiscal policy has become more supportive of markets and the trade war threat is receding all of which should support decent gains for share markets through 2019 as a whole. Low yields are likely to see low returns from bonds, but government bonds continue to provide an excellent portfolio diversifier. Expect Australian bonds to outperform global bonds.
National capital city house prices are expected to fall another 5-10% into 2020 led by Sydney and Melbourne on the back of tight credit, rising supply, reduced foreign demand, price falls feeding on themselves and uncertainty around the impact of tax changes under a Labor Government.
Cash and bank deposits are likely to provide poor returns as the RBA may cut the official cash rate by year end.
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