Sharp market falls with headlines screaming that billions of dollars have been wiped off the share market are stressful for investors. The current situation is doubly stressful because of fears for our own and others’ health – particularly for the elderly. However, several things are worth bearing in mind.
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The hit to economic activity is deepening & the risks around Covid-19 becoming a pandemic have risen leaving shares vulnerable to more near term falls. The key for most investors though is to recognise that periodic share market falls are inevitable & hard to time & so it’s best to take a long-term approach to investing.
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With inflation low, and as long as recession is not imminent, it makes sense that traditional valuations like PEs are higher than their long-term average. Similarly, it makes sense that property yields are lower than normal, but the fall in Australian housing yields has been extreme relative to commercial property & shares.
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Our natural inclination to zoom in on negative news combined with a massive ramp-up in the availability of information is arguably making us worse investors: more fearful, more jittery, more short-term.
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The China coronavirus outbreak has led to concerns of a global pandemic triggering an economic downturn. Our base case is that the outbreak will be contained allowing share markets and bond yields to rebound.
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Our high-level investment view for this year is that a combination of improving global growth-boosting profits and still easy monetary conditions will help drive reasonable investment returns, albeit more modest than the very strong gains of 2019. This note revisits five charts we see as critical to the outlook.
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Despite ongoing bouts of volatility, 2020 is likely to provide solid returns, albeit slower than seen in 2019. Watch US trade wars, the US election, the US/Iran conflict, global business conditions indicators, and monetary versus fiscal stimulus in Australia.
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The bushfires are expected to result in around a 0.4% hit to GDP mainly in the March quarter followed by a rebuilding boost. The drag on economic activity has increased the pressure for more monetary and fiscal stimulus.
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2020 is likely to see global growth pick up with monetary policy remaining easy. Expect the RBA to cut the cash rate to 0.25% and to undertake quantitative easing.
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There is good reason to believe we may be close to the low in the $A (or have already seen it): it has already had a large fall; it is just below fair value; the global economic cycle is likely to turn up next year; sentiment towards the $A is very negative; and the current account is in surplus.
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While growth assets like shares go through bouts of short-term underperformance versus bonds & cash, they provide superior long-term returns. It makes sense that superannuation has a high exposure to them.
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There is no denying concerns about global debt, seemingly never-ending QE, more debt trading on negative interest rates, inequality & geopolitical threats. However, some of these concerns are exaggerated and there are five reasons why I am not so fussed about the global outlook.
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The world of investing can be confusing and scary at times. But fortunately, the basics of investing are timeless and some investors (often the best) have a knack of encapsulating these in a sentence or two that is insightful and easy to understand. In recent years I’ve written several insights highlighting investment quotes I find particularly useful. Here are some more.
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These five great charts help illuminate key aspects of investing for income (or cash flow): there are alternatives to bank deposits for income; the gap between yields on different assets provides a guide to relative value; shares can provide stronger growth in income with less volatility than bank deposits; a high and sustainable income yield from an investment provides security; and yield is a guide to future returns.
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A per capita recession on its own is not the same as a real recession, and the three seen over the last 28 years do not compare to the recessions of the early 1980s and early 1990s in terms of their impact on jobs, economic welfare and confidence.
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The ongoing slide in investment yields across major asset classes points to a more constrained medium-term return outlook. For a diversified mix of assets, this has now fallen to around 5.6% pa on our projections.
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The choke point for global growth from higher oil prices is normally a doubling in prices. We are a long way from that but key to watch will be how long the supply disruption lasts and whether there are more attacks from Saudi Arabia or the US.
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The combination of rate cuts, the election and a modest regulatory relaxation have helped turn property prices back up, but the upswing is likely to be constrained.
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However, while the risks have gone up, recession remains unlikely: tax cuts should help growth in the current half year; the threat from falling property prices has receded; infrastructure spending is booming; the low $A is helping growth; the drag from falling mining investment is over; the current account is in surplus; there is scope for extra fiscal stimulus; population growth remains strong; and cyclical spending is low.
Read MoreUnconventional monetary policy measures could help the economy, but negative interest rates are unlikely and quantitative easing would be most effective and fairest if combined with fiscal stimulus.
Read MoreWorries about the US trade wars and global growth are continuing to cause volatility in investment markets. While the risks have increased, we remain of the view that recession is unlikely.
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Share markets may need to fall further in the short term to remind both sides of the need for a deal and get them talking again. However, we regard the fall in share markets as another correction rather than the start of a major bear market.
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We expect another one or two 0.25% cuts with the next in September but with US recession unlikely this rate-cutting cycle is likely to be limited. Fed and global monetary easing generally should help boost global growth into next year.
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While the Australian share market is at risk of a short-term pullback it’s likely to be higher on a 6-12 month horizon and its period of relative underperformance compared to global shares is likely at or close to an end.
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While the yield curve is flashing warning signs and issues around trade and Iran could cause short-term volatility, the excesses that normally precede US recessions – a spending boom, surging private debt and/or rising inflation/tight monetary policy – are absent.
Read More2018-19 saw solid returns for diversified investors, helped by a sharp rise in share markets in the last six months & solid returns from most assets, except cash.
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While the risks are higher this time around, my inclination is still to see the current period as just another global growth scare like those in 2011-12 and 2015-16 which will give way to somewhat stronger growth globally and higher share markets on a six to 12 month view.
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Several positives suggest recession is unlikely: the current account deficit has collapsed; the $A helps stabilise the economy; the drag from falling mining investment is over; there is scope for extra fiscal stimulus; infrastructure spending is booming; there has been no sign of panic property selling; economic policy remains sensible; population growth remains strong; and the RBA can still do more.
Read MoreGiven the downside risks for the $A and that being short the $A is a good hedge against threats to the global outlook it still makes sense for Australian investors to maintain a decent exposure to foreign currency via un-hedged global investments.
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My nine most important lessons from investing over the past 35 years are that: there is always a cycle; the crowd gets it wrong at extremes; what you pay for an investment matters a lot; getting markets right is not as easy as you think; investment markets don’t learn; compound interest applied to investments is like magic; it pays to be optimistic; keep it simple; and you need to know yourself to succeed at investing.
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The RBA’s latest rate cut is aimed at heading off a further slowing in growth which would threaten higher unemployment and lower for longer inflation. For investors, it means low-interest rates for even longer.
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The election outcome removed a key threat, but several other factors also suggest that property prices could be nearing a bottom. In this note, Shane Oliver looks at the key issues.
Read MoreAfter taking a back seat over the last six months as negotiations appeared to make progress the US/China trade war is back on with the President Trump – “tariff man” – ramping up tariffs on Chinese imports again and threatening more and China moving to retaliate. This note takes a simple Q & A approach to the key issues.
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Seasonal patterns have long been observed in equity markets. Yet, despite the potential they provide for astute investors to profit from them – and in so doing arbitrage them away – they seem to persist.
Read MoreSurprisingly weak Australian inflation has led to expectations the Reserve Bank will soon cut rates. But what’s driving low inflation? Is it really that bad? Why not just lower the inflation target? Will rate cuts help? And what does it mean for investors?
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Labor’s higher tax and regulation agenda may be a negative for Australian assets, but this could be partly offset in the short term by more targeted fiscal stimulus.
Read MoreThe 2019-20 Budget has a sensible focus on providing support to households at the same time as returning the budget to surplus. However, the actual fiscal stimulus is pretty modest – particularly for a pre-election budget – and comes with greater than normal uncertainty given the upcoming election.
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The rebound in share markets since December has left them vulnerable to a short term pullback. Worries about global growth as evident in plunging bond yields and the flat/inverting US yield curve (and risks around trade) could provide the trigger.
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Growing support for higher taxes on the rich and greater government intervention in the economy suggest median voters have shifted to the left. Support for economic rationalist policies has fallen.
Read MoreAustralian growth slowed even more in the December quarter. Growth may bounce back a bit this year, but the housing downturn will likely constrain it to around 2- 2.5%.
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