Which direction will the stock market go in 2020? 

6 analysts share their stock market predictions for the next 12 months.

Australia’s economy is passing through a very unusual time. Interest rates are at historic lows, the stock market is hitting record highs, yet wage growth remains flat and consumer spending is going in the wrong direction.

That combined with changing global trade dynamics makes for an interesting year when it comes to investing. I asked 6 market analysts about their predictions for the next 12 months and the big themes they thought would impact your investments, here’s what they had to say.

Remember: No one can truly predict what the stock market will do, these are speculations based on past events and future projections.

Stock market to slow down

Last year was a smashing one for stocks – Australia’s benchmark ASX200-index returned 23% on average – but the broad consensus is that stocks will not be as strong in 2020.

This is because future economic improvements on the back of low interest rates have already been priced in, according to Pepperstone’s head of research Chris Weston.

“The market has taken the [economic] performance of 2020/21 and they’ve put it into 2019,” Weston told Finder. “Therefore, when you look at expected returns, it’s very difficult to believe we’re going to see anything like what we did in 2019.”

S&P ASX-200 index in 2019

Bell Direct’s market analyst Jessica Amir agrees that we're unlikely to see double digit returns for a second year in a row.

“The broad market is only expected to deliver a return of 8% (excluding dividends),” Amir told Finder. “If you’re seeking stronger returns than the Aussie share market’s benchmark, you will need to work for them.”

That means investing in an index fund (a fund that passively tracks the performance of the stock market) won’t cut it for high-growth over the next 12 months as it did in 2019.

...But not a bear market

One of the biggest questions for investors is whether the stock market will crash after such a big run up.

In fact, there's little evidence that stock markets normally go backwards after a strong year, according to Burman Invest’s chief investment officer Julia Lee. She predicts the stock market will continue to be a good investment in 2020.

“When asset prices go up strongly, investors tend to get wary. They get scared that what goes up must come down. The numbers tell a different story - Lee

Of the 26 other instances in history where the global share market (MSCI index) has delivered double digit growth since 1970, on 19 occasions it was followed by another positive growth year, Lee told Finder.

Interest rate cuts

In any case, with interest rates predicted to drop twice more this year, Lee says there are few alternatives other than stocks or property for investors seeking high returns.

Weston agrees that despite a slow down, stocks will continue to be one of the best investments for your money this year. “What’s worked in 2019 will continue to work in 2020 – we’re just not expecting to see the same returns,” he says.

When it comes to stock selection, Amir suggests investing sectors that are backed by physical assets such as property or infrastructure stocks.

“When interest rates drop, serviceability on loans increases and pushes property valuations up. You could look at high quality property investment companies, listed Real Estate Investment Trusts (REITs), as well as the property index itself (ASX200 A-REIT).”

Read our guide on how to invest when interest rates are low for more money ideas in the year ahead.

Weak AUD + USD

Low interest rates usually lead to a lower local currency. All things equal, if rates remain low in 2020 as predicted, we can expect the AUD and USD to remain weak.

This should support Australia's export sectors such as energy, mining and tourism, and also have a positive impact on commodities markets, according to editor of FN Arena, Rudi Filapek-Vandyck.

“It automatically opens the door to rallies for base metals, gold, emerging markets and fringe currencies,” as he explained in a recent Finder X article.

“It would also translate into an exogenous headwind for many of the better performers in the local share market, including healthcare and technology stocks,” says Filapek-Vandyck.

Ethical investing

With Australia literally ablaze, there has been a marked shift in consensus towards climate change both here and overseas. Many analysts expect this to have a notable impact on stock performance this year.

In fact, head of equity strategy at Saxo Bank Group, Peter Garnry, believes "green stocks" will be the next mega trend in equities, thanks to government and investor support.

“Investors should tilt portfolios towards these new green industries,” Garny advised in a recent note to clients. He suggested looking to stocks with exposure to sectors such as renewable energy, bioplastics, electric vehicles and plant-based foods.

If you're interested in green investing, take a look at our guides on renewable energy stocks, ethical super funds and sustainable ETFs.

US election

Few events on the calendar have the potential to be as disruptive to stocks as the upcoming US election in November.

While the first half of 2020 is predicted to remain fairly positive for stocks, the US election and changes to Brexit bring a number of risks in the second half, warns IG Group's market analyst Kyle Rodda.

"It’s probably going to be a pretty rough and tumble election that could really throw up some divergent views in terms of economic management.

Donald Trump, for all his short-comings, has been a boon for the stock market thanks to his pro-business tax legislation. If he's not elected for a second term, Rodda told Finder we might see a stock market reversal.

“It depends on who is elected. If you get someone like Elizabeth Warren, who is considered a very market unfriendly candidate... that would probably be the least desirable action for the stock market."

Housing credit boom

If Australia’s economy takes a turn for the worse, the RBA may be forced to step in and intervene with quantitative easing (QE) measures.

QE is where central banks pump cash into the economy by buying up bonds and securities from banks and other major institutions. In the case of Australia, this could be the RBA buying up mortgage-backed securities from the banks, according to Weston. This would have a flow-on effect on the housing market.

“If inflation starts to drop along with wages growth and higher levels of unemployment, the market will get pretty excited about the idea that the central bank in Australia is going to do residential mortgage backed security purchases,” he says.

“In that situation, we would see the bank’s borrowing costs significantly reduced and that will have a flow on effect into housing,” says Weston.

In other words, if the banks get cheap funding from the RBA, we could end up with a credit boom in the housing market and even lower mortgage rates.

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