Economic Uncertainty, Market Volatility – What’s Next?

At the time of writing world share markets have been see-sawing with the bias to the downside, particularly here in Australia, and the mood out there has been decisively gloomy. Whether this is signalling the onset of recession or is just a so called healthy correction is a question that has raised its ugly head. We have not had a recession in Australia for many years and we very much doubt that one is creeping up on us now.

Sure, our terms of trade have deteriorated very significantly with currently no end in sight to the decline in commodity prices. The situation is overshadowed by the stumbling Chinese economy and therefore the waning of demand for our traditional exports. Then we have the continued problem of lack of growth out of Europe now beset by the humanitarian refugee flows and whatever political and economic effects these will cause. Somewhat paradoxically, the ‘failure’ of the US Federal Reserve to raise interest rates, which had been almost uniformly anticipated to occur in September, may have put a question mark on the real strength of the US economy. Our Australian interest rates continue at rock bottom level with our Reserve Bank only hesitating to move them down further due to the worry of booming house prices in Sydney and parts of Melbourne.

Australian shares currently represents good long term value having backtracked significantly from its high earlier this year, dividends are generally continuing to grow and for the long term investor we feel confident that shares from these levels will provide better total returns than other asset classes. International shares are also moderately positive, with a bias towards Europe with more potential than the relatively more expensive US market.

However, there are positives as well, although media loves bad news more than good news – they sell better and it is a fact of psychology that we humans are predisposed to react more strongly in the face of fear than in responding to positive news. The US economy, still the world’s growth engine, is improving slowly. The European situation is not getting worse and the fear that the parlous situation of the Greek economy spreading to other vulnerable economies, the so called contagion risk, has receded. Here at home the economy is showing signs of re-balancing away from resources based to being more broadly based with the net effect of more jobs being created than being lost. (Yes, the unemployment rate has ticked up but the main reason for this appears to be a rise in the labour force participation rate.) Currently at least, the dumping of Mr Abbott in favour of Mr Turnbull as our new Prime Minister, appears to have injected some optimism as regards our economic future and if this effect is sustained it may lead to an improvement in business confidence which has been sorely lacking for some time.

We believe in the following quote attributed to the 84 year old Oracle of Omaha, Warren Buffet, generally considered the most successful investor of our time.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.