The Economy and Investments

In our most recent Newsletter we noted that both the Australian economy, and the world economy more broadly, looked to be on a path of positive, synchronised growth. Domestically, the drag from reduced mining investment following the end of the mining boom has been countered by increased non-mining investment, particularly a substantial boost to much needed infrastructure spending but also to housing construction. Given a somewhat unexpected part-recovery in the pricing of commodities, i.e. such as base metals, coal and liquid natural gas, combined with increased volumes of such exports, we are again experiencing a lift in mining related income and growth at the same time as non-mining investment is on the improve. Total growth has helped to reduce unemployment somewhat and increased the tax take with the consequence that the Government budget deficit is shrinking faster than previously expected.

Does this auger well for continued, untroubled economic expansion and enhanced investment returns? As always, we can never be sure about what the future might have in store. We are of course very dependent on developments in the rest of the world, especially in the USA and perhaps even more importantly these days, in China. The US economy is looking good despite, or perhaps because, President Trump and his various policy initiatives. But the economic expansion over there is looking a bit long in the tooth and we never know whether the President’s ‘twittering’ and threats regarding friends and foes alike will extend to more than bluster.

His imposition of tariffs might yet result in considerable dislocation to world trade and a full-blown tariff war would have devastating consequences for China’s economy and therefore also to Australia. China is still growing its economy at a fast pace, but the country and its institutions carry a lot of debt.

Apart from international ow-on effects, and the emergence of any completely new factor X, domestically there is still concern about slow wage growth and its effect on consumer spending. The housing markets in Melbourne and Sydney are weakening, which in essence is a welcome development, but is also a latent worry if it gets a lot worse causing people to feel less prosperous, reducing their spending.

However, despite potential pitfalls the basic outlook is still positive and hitherto share markets have done quite well this year. This should continue even if current valuations are a bit stretched.
The impending company reporting season is just getting under way and we should see further earnings growth and increased dividends on top of those reported half a year ago.

Commercial property should also continue to strengthen but now is not the time to think of adding to residential property investment. As far as cash investment is concerned there is very little sign of light at the end of the tunnel. Interest rates are rising in the US but most analysts are continuing to extend the timing of any expected rises here, even in to 2020.