This year is shaping up to be a very important year. Will it be the start of an Australian recession, leading to a negative outcome for ASX shares and your portfolio?
Oscar Oberg is a Lead Portfolio Manager at Wilson Asset Management, the firm that runs several listed investment companies (LICs) including WAM Capital Limited (ASX: WAM), WAM Leaders Ltd (ASX: WLE) and WAM Research Limited (ASX: WAX).
Mr Oberg shared on the ASX website ten things that he and the WAM investment team are monitoring this year:
The US Fed has softened its outlook for interest rate rises this year, with economists now expecting two rises in 2019. Inflation rising faster than expected could still see the Fed increase interest rates faster than anticipated.
The Australian dollar
WAM believes the Aussie dollar could fall below 70 US cents due to an Australian economic slowdown and the rising US interest rates. The RBA may decide to reduce the Australian interest rate even further due to house prices and poor consumer sentiment. Doing so may stimulate growth.
Health of the Chinese economy
Mr Oberg said recent infrastructure measures have done little to boost the Chinese economy and the US-China trade war isn’t helping either. Chinese manufacturing’s Purchasing Managers Index (PMI) has been steadily declining and the global demand for steel is also apparently softening. China may unveil other measures to help growth.
Chinese infrastructure spending should boost commodity prices, particularly iron and coal, however demand remains subdued.
I’m sure BHP Group Ltd (ASX: BHP) will be closely watching the situation in China.
Mr Oberg said OPEC recently announced cuts to production between OPEC and non-OPEC producers to reduce supply by 1.2 million barrels for another six months. This should support the oil price, which could be good for Santos Ltd (ASX: STO), Worleyparsons Limited (ASX: WOR) and Woodside Petroleum Limited (ASX: WPL).
WAM expects house prices to fall another 10% in 2019 due to scrutiny and regulation of the banks tightening lending & reducing demand. Home owners face several headwinds and he said it’s hard to see how the east coast can recover in the near term.
However, Mr Oberg did say that the Western Australia market could recover in 2019.
The Australian consumer
Falling house prices in-particular, along with higher petrol prices, are affecting discretionary retail. Little wages growth means consumer spending is likely to tighten further this year.
Bull market over
Inflation concerns in the US, the IMF cutting growth forecasts and a potential change in government in Australia are all adding uncertainty for investors and the economy. Mr Oberg said there are indications we are in a bear market.
US dollar earners
WAM believes the US dollar will rise this year, with companies exposed to the currency being direct beneficiaries.
Three of the ASX shares that Mr Oberg named as possible candidates are generic drug manufacturer Mayne Pharma Group Ltd (ASX: MYX), shipbuilder Austal Limited (ASX: ASB) and intellectual property law firm IPH Limited (ASX: IPH)
Large-caps to outperform small-caps
Finally, based on liquidity pressures and high valuations, WAM thinks large caps will out perform small caps in 2019.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended IPH Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.