Economics & Markets

Confidence returning to the share market

By Dermot Ryan
Sydney, Australia

Over the later stages of May we saw Australian equity markets rally after the surprise Coalition win in the Federal election. This was despite ominous signs from the bond market, with record-low 10-year bond yields recorded around the world, and a number of large falls across global equity markets.

Large spike in bank and other property related stocks saw Australian equities outperform after the shock election win

So, what caused this burst of bullishness in local markets and allowed us to buck the global downtrend?

Stimulus coming down the pipe

In our view, the driver was the market starting to get excited about how forthcoming stimulus measures might be able to revive the local economy after two slow quarters of growth.

The stimulus is coming from four key areas:

  1. Interest rate cuts, which have finally started to come through from the Reserve Bank of Australia with several more cuts priced into fixed income markets;
  2. Tax cuts, which were announced in the Federal budget earlier this year and will now, following the Coalition’s election win, likely begin early in the 2019-20 financial year;
  3. Housing policy stimulus, seen in some announcements aiming at helping first home buyers get into the market, by lowering the amount of a deposit they will need and removing the requirement for lenders’ mortgage insurance in those circumstances; and
  4. Credit stimulus, arising largely from the Australian Prudential Regulation Authority’s (APRA) proposed increase in the maximum borrowing capacity of creditors.

It’s also worth noting that in addition to the stimulus, the market bounce was aided by a number of tax changes proposed by Labor, such as relating to negative gearing and capitals gains tax, no longer going ahead. In our view, this helped see residential property developers, building materials and banks rally in some cases more than 10 per cent higher.

Is this the turning point for house prices?

In the short term, this stimulus has also had a positive effect on the property market and we’re starting to reach a turning point in terms of auction clearance rates and house price declines.

Whether this can be sustained in the next few months, or even push prices back up again, is yet to be seen, as the level of debt in the property market is still very large and valuations are stretched.

However, we believe at the very least, the change in momentum is welcome and certainly positive for the economy.  

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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