Economy & investment return outlook

We were somewhat surprised to note how the rather sharp decline in the Australian and international share markets at the end of the 2018 calendar year totally reversed during the first quarter of this financial year. Perhaps the previous worry about several mooted interest rate increases in the US and concern about the US-China trade war were the major causes for the back-tracking of the markets.

With these concerns seemingly disappearing into thin air, the markets appear to suggest that they got it all wrong so then rapidly changed course again. Nevertheless, such a quick recovery is unusual, and whilst we certainly cannot know the future course, we are not convinced that the renewed market optimism is well founded.

The reason for the prospect of near-term rises in US interest rates evaporating is the deterioration in the outlook for world economic growth. If growth is stalling, as is the expectation of most economists, then interest rates should be lower rather than higher to encourage new investment and consumption,

eventually stimulating general economic growth. However, in the phase of deaccelerating growth, or perhaps even negative growth, company profits could be expected to at least moderate if not fall which in turn should lead to lower company share prices. Of course, there are other factors at work as well but when one also notes that both Australian and international share prices are relatively elevated, we think that the risk of a more substantial share market correction has increased.

However, we never know what might happen and in any case for any share investor looking more than, say, a few years ahead (and if you don’t you should not be a share investor), short term gyrations should not be a concern. Each economic cycle may well be different but in essence measures to counter an economic slowdown should eventually serve to foster growth again. Given current competing asset classes outlook it is still hard to beat the share market, certainly for growth in the longer term and currently even for income from investment.

Just don’t try to trade the market in and out – neither we nor anybody else have the recipe to do so with any degree of confidence. A significant difficulty still remains, namely to pick the right stocks to hold, as individual company share fortunes deviate substantially from broad market moves, but this is a task with which we, as financial advisers, endeavor to help our clients.