- Morgan Stanley is more bearish than the RBA in terms of its 2019 growth outlook.
- The bank has highlighted four key drivers for the domestic economy next year: housing, trade, banks and politics.
- Among them, housing is “the key headwind facing the economy”, but the government’s projected budget surplus could provide an important offset.
It’s early December — a fun time of year for many, with Christmas drinks, carols and holiday travel plans.
And for market analysts, it also marks a good time to take stock of various outlooks and forecasts for 2019.
Morgan Stanley has issued one of the first sets of projections, with a 2019 deep dive covering stocks and the economy.
Inevitably when making future projections, there are multiple grey areas to address — a reality MS alluded to via use of the phrase “constructively cautious” when describing the outlook.
Here’s a summary of the bank’s key economic forecasts for 2019 and 2020:
MS reckons the ASX200 will trade between 5,700 and 6,100 next year, with a year-end target of 6,000 — a gain of around 5% from current levels.
More broadly, the bank’s economics team are forecasting real GDP growth of 2.5%, which is a more pessimistic view than the RBA’s prediction of 3.25%.
And whether those predictions come to pass or not depends on the relative performance of four key “flashpoints”: housing, trade, banks and politics.
This is “the key headwind facing the economy in 2019 and 2020”.
Like many analysts, the team at Morgan Stanley are watching like a hawk for any signs of falling consumption caused by a negative wealth effect from falling house prices.
The bank’s most recent modelling is pointing to price declines of 10-15%, which would mark the biggest downturn since the 1980’s.
Australia’s household savings rate is also historically low, officially reported at just 1% (although Macquarie isn’t so sure about that). Which doesn’t leave much room to move if households refocus on paying down debt.
A decline of 15% would put “a serious dent in net worth” to the tune of around $US700 billion, MS said. And that may see consumption growth — the biggest part of the economy — fall by between 1-4% over the next couple of years.
In view of that, the next couple of months are shaping up as essential viewing, because if cracks are starting to show it “will likely be seen over the 2018/19 Christmas trading period“.
Australia’s banks have been hit hard this year, and Morgan Stanley is sensing a “real desire” among investors to wade back into the banking waters at current valuations.
But the analysts also highlighted numerous reasons to take “a more cautious view”.
Firstly, markets are in something of a holding pattern awaiting the Royal Commission’s final recommendations in February.
And structurally, the bank says Australia’s 25-year mortgage bull market has come to an end. On the face of it, that means less profit for banks as credit growth slows.
Morgan Stanley doesn’t see a turnaround in that slowdown happening anytime soon, and “the risk reward of stepping in before that ultimate adjustment is not appealing”.
The Morrison government needs to call a federal election by May next year. And when they do, the Labor opposition has firmed up as the favourite to win it.
Whichever side wins, Morgan Stanley reckons this is the most important election for markets in a decade, “given the substantial policy divergence between the major parties”.
Housing-linked sectors and the big banks are most exposed to the “key debates around negative gearing, capital gains tax and dividend imputation”.
If Labor wins and is able to legislate its proposals to reduce tax advantages for property investors, MS said that could also weigh on consumption patterns.
However, “the net effect is less clear, given greater scope for low/middle-income tax relief and spending on public services”.
Aside from electoral uncertainty, Morgan Stanley did highlight one government-related positive — the improved position of the federal budget.
The projected surplus could help provide an important buffer if ongoing falls in house prices give rise to a consumption crunch:
The US and China have suspended tariffs against each other for now.
And some other positive signs in the wake of the G20 summit have led Morgan Stanley’s Asia strategists to upgrade Chinese stocks to “overweight” in their regional portfolio.
Longer term though, the gap between the US and China on a “legal, economic and geopolitical basis remains wide”, MS said.
Which means it’s likely to present a lingering risk to global markets over the next 18-24 months.
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