Geopolitically the world appears to be sliding into greater uncertainty. It is not just the local wars in Syria, Yemen, in various parts of Africa, and, perhaps uppermost in most people’s minds, the increasing incidence of terror attacks affecting western countries, but also the rumblings emanating from Russia and China.
The Russian bear under Putin is flexing its muscles having started with Crimea and continued with aggressive posturing towards the west in general and perhaps the Baltic area in more particular. China is also raising its military and industrial power profile, with threatening behaviour around the South China Sea islands it claims as its own. Then there is the US election with a potential Trump win that most non-Americans, at least, consider unsettling.
Economically there is no shadow of a doubt that China is still in ascendency in spite of a raft of potential structural imbalances that might cause economic wobbles and pull-backs in the short and medium terms. The story is different for Russia, a country with serious financial problems, the decline of which might possibly be checked should there be a strong reversal in energy prices. Perhaps it is these difficulties, possibly exacerbated by a national feeling of loss of status since the end of the Soviet Union, that have caused the leadership to adopt their current stance.
How does this bigger picture affect the behaviour of world and Australian investment markets? Not a great deal one has to conclude. The behaviour of the markets is apparently more influenced by economic circumstances, particularly the continued low levels of interest rates, inflation and world economic growth prospects. Asset prices have been pushed somewhat beyond what traditionally has been considered fair value, no doubt fuelled by demand from yield seeking investors who cannot derive reasonable income from super safe bank and Government bond holdings. As long as interest rates remain at record low levels around the world, fair value of yield producing assets may justifiably be higher than during more normal times. Commentators and investment specialists agree that there is no real alternative to generate acceptable investment income than to move up the investment risk curve.
So how do we think our investing clients should act against this background scenario? Basically, proceeding as usual is most likely the way to go. Proceeding as usual is, and obviously should be, a highly individual matter, taking into account one’s circumstances, risk profile, needs and aspirations. After all, markets fluctuate in response to political events, economic and financial fundamentals, company specific events and even psychological factors and, almost to summarise, in accord with forward looking expectations. In spite of various shocks and crises over the years markets normally grind higher in the longer term. If one were to wait for an ideal point in time before investing one might never commit, or when conditions appear to be near ideal asset prices might have been pushed unsustainably high. Nevertheless, clients with short term horizons or being highly risk averse might adopt a somewhat more cautious stance.