February was a good month for share markets with global shares rising 5.57% in local currency terms and Australian shares gaining 5.98%.

There were three positives on the global policy/geopolitics front over the last week. First, reports indicate that the US and China are close to a trade deal and that President Trump is keen to announce a win on this ahead of his 2020 election campaign. Second, China’s National People’s Congress saw more policy stimulus announced (including a cut to the Value Added Tax rate equal to around 0.6% of GDP) with the growth target set at 6-6.5% for this year which is in line with market expectations. Finally, as widely expected the European Central Bank announced another round of cheap bank funding (which is a form of quantitative easing) and further pushed out its commitment to keep interest rates down. A settling of trade issues and a shift to policy stimulus (or at least more dovishness in the case of the Fed) is consistent with our view that global growth will improve into the second half this year and the combination of stronger growth supporting profits and still easy monetary policy will likely make this a good year for shares. The trouble in the short term though is that share markets have run hard from their December lows and, with global economic data still weak right now, they are vulnerable to a short term pull pack.
Doom and gloom on the Australian economy has gone into overdrive. But there are five things you need to know about the Aussie economy.
First, economic growth has slowed further and is likely to remain weak going forward as the housing downturn continues, dragging on construction activity and consumer spending. 
Second, while we have gone into a “per capita recession” with two quarters of growth running below population growth, these have occurred occasionally before with the last one in 2006 during the mining boom!
Third, a conventional recession remains unlikely given that the mining investment slump is near its bottom, non-mining investment is looking healthier, infrastructure investment is strong, global and specifically Chinese growth is likely to pick up later this year, the April budget is likely to see tax cuts/fiscal stimulus and the RBA can cut interest rates.
Fourth, but while a conventional recession is unlikely, growth is likely to be well below what the RBA is expecting, and this will drive higher unemployment and lower for longer wages growth and inflation, the anticipation of which will drive the RBA to cut interest rates at least twice this year. We had thought that this would not occur till August, and after the budget and election were out of the way so the Bank could get a chance to assess any fiscal stimulus, but the run of weak data is increasing the risk that the first cut will be sooner. Maybe even on budget day next month to get it out of the way before the election campaign! Waiting for unemployment to rise runs the risk of being too late!
Finally, it’s worth noting that the east coast drought is continuing with the Southern Oscillation Index indicating a minor El Nino. Over the last year the drag on growth has only been around 0.15 percentage points, but it could increase the longer the drought continues.
Shares are likely to see volatility remain high with a high risk of a short term pull back, but valuations are okay, and reasonable growth and profits should support decent gains through 2019 helped by more policy stimulus in China, Europe and Australia and the Fed pausing.
Low yields are likely to see low returns from bonds, but they continue to provide an excellent portfolio diversifier.
Unlisted commercial property and infrastructure are likely to see a slowing in returns over the year ahead. This is likely to be particularly the case for Australian retail property.
National capital city house prices are expected to fall another 5-10% into 2020 led again by 15% or so price falls in 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 cuts the official cash rate to 1% by end 2019.
The $A is likely to fall into the $US0.60s as the gap between the RBA’s cash rate and the US Fed Funds rate will likely push further into negative territory as the RBA moves to cut rates. Being short the $A remains a good hedge against things going wrong globally.