Experts predict 2019 is likely to be another volatile year for the Australian share market

2019 is likely to be another volatile year for the Australian share market, but it is expected to rise more stably in the second half.

Experts are forecasting a bumpy ride for the ASX amidst the ongoing uncertainty of Brexit, concern about interest rates rising too quickly in the United States and an expected slowdown in global economic growth.

But the biggest risk to global markets is the unresolved US-China trade war, and whether the two economic powerhouses can agree on a trade deal before their 90-day truce expires in early March.

If not, US President Donald Trump, who had proudly called himself a "Tariff Man", is expected to increase his tit-for-tat tariffs on China's imports.

A failure to end the dispute would lead to the ASX 200 sliding further into the red — beyond its 7 per cent drop in 2018.

Conversely, a successful US-China deal would likely lead to a sharp recovery from the heavy global sell-off that has been occurring since October.

Last year, major stock indices including Wall Street's S&P 500 (-6pc), Germany's DAX (-18pc) and the Shanghai Composite (-25pc) also suffered heavy losses, which an ongoing trade spat would only exacerbate.

"Markets [have] somewhat priced in those risks since they've been known for the last 6 to 8 months — [or] two years in Brexit's case," said Jun Bei Liu, portfolio manager at Tribeca Investment Partners.

"We should take comfort knowing that at least it's not a surprise."

Deal or no deal?

The latest signs seem encouraging, according to US President Donald Trump's recent tweet on Sunday.

"Just had a long and very good call with President Xi of China," he wrote.

Whether a market analyst was optimistic or bearish about the local market's prospects depended on their outlook on whether the US and China manage to agree on a deal.

"We take the view that it is very much in the interests for both countries to have the dispute resolved," said Commsec chief economist Craig James.

"And while it may take a little longer than the March 1 date set for resolution, we believe enough progress will be made to provide optimism for investors."

Mr Trump is likely to want a solution before the US economy gets impacted significantly, which would threaten his election prospects in 2020.

Chinese President Xi Jinping is also likely to be keen on a swift resolution as the trade dispute has already affected his country's economy.

In October, China reported economic growth of 6.5 per cent year-over-year in the third quarter of 2018 — the weakest pace since the first quarter of 2009.

Commsec was very bullish about the local bourse's prospects, and anticipates it will rebound by 10 to 12 per cent this year.

Meanwhile, AMP Capital's forecast was slightly less positive, but still upbeat.

"Australian shares are likely to do 'okay' but with returns constrained to around 8 per cent with moderate earnings growth," said AMP chief economist Shane Oliver.

He expects the ASX 200 to climb its way back to the 6,000-point threshold by the end of this year.

Domestic pressures abound

On the domestic front, the local market's volatility might surge around early-February, when the banking royal commission releases its final report.

The big four banks — Commonwealth Bank, Westpac, NAB and ANZ — have collectively lost $67 billion in value with a plunge in their share price, since the public inquiry started shining a light on the extent of their systemic misconduct over the years.

However, some analysts believe the banks' fortunes might improve this year.

"While the report is unlikely to be pleasant reading it could also, interestingly, bring more certainty to the sector as companies start to put poor behaviour and bad press behind them," said Fidelity International portfolio manager Paul Taylor.

However, it could also depend on how damning Commissioner Kenneth Hayne's findings are, and what he ultimately recommends in the way of bolstering regulation in this "too big to fail" industry.

Investors may also feel anxious around the time of the federal election, which is expected to be held in May.

"While there are concerns around some possible policy changes like capital gains tax discount, negative gearing and franking credit refunds, it is likely that the election results will bring more certainty," he said.

His opinion was predicated on the basis that Labor will win the next election.

"Australia has had considerable political instability over the last decade and the 2019 federal election result has the potential to bring more stability."

Market bets

"The Australian economy is the biggest risk at this point," Ms Liu said.

"Consumer spending is weak, the housing market has fallen sharply, and there's a big flow-on impact across the construction and consumer sectors."

She believes several foreign markets will outperform the ASX 200 this year.

"Emerging markets in Asia have fallen heavily last year. They've become cheaper, and have reached a good valuation now."

"And wherever ether you put money in the US, companies operating in that market do quite well — but in terms of valuation, they're becoming quite expensive."

Fidelity International managing director Alva Devoy also believes Wall Street is still a decent investment, despite US corporate earnings growth dropping from about 24 per cent (in the first three quarters of last year) to an estimated 8 to 9 per cent this year.

"These factors are however one offs, and we expect their impact on earnings growth to fade in 2019."