UNCERTAINY – The Current Normal!
In a previous Newsletter article, we have mentioned that investment markets fluctuate in response to a whole range of factors, i.e. political events, economic and financial fundamentals, company specific events and even psychological factors and, perhaps to summarise, in accord with forward looking expectations.
Currently, we could perhaps amplify this statement by referring to the impact from tweets from President Trump. We have probably never seen a single factor having such a significant effect on the short-term movements of investment markets around the world. Of course, his tweets range across all the above factors. One day it is about new tariffs on Chinese goods or a brightening outlook for negotiations with China, the next, initiatives as regards North Korea or now Turkey, then taxes for certain sectors of the economy or particular companies, etc, etc.
Should we worry about all of this and the fact that the markets rise and fall in close accord with all these tweets? The answer is probably both yes and no. The markets are always forward looking, and it is a fact that statements uttered by the President do have a bearing on the outlook for the whole world political and economic position. However, we should try to concentrate on the big picture – what is actually happening longer term and what is Trump trying to achieve, or more likely, what is he able to achieve given that he certainly cannot hope to control neither his domestic environment nor the global situation.
At the time of writing and in no small manner due to Trump’s manoeuvrings, there is a lot of uncertainty geopolitically and the world is experiencing a downturn in economic growth. The major economic issue is still the US-China trade war with tariffs inhibiting trade and causing cost pressures now affecting consumers in the US as well as China. From time to time there have been noises about a truce, but…. Whilst the US probably have justifiable arguments in terms of what China has got away with in the past, the fact that there will be
a presidential election in the US at the end of next year and that US consumers are suffering suggest that the President will come under mounting pressure to somehow achieve some sort of a deal. Let’s not dwell on other significant issues other than to state that Brexit eventually will be sorted out and that Hong Kong worries are likely transitory.
If the above issues settle down in a reasonably satisfactory manner does this mean that the economic backdrop suddenly brightens? Not likely in the short term. The economic growth slowdown is a longer-term problem. The International Monetary Fund has downgraded its outlook for growth for this year and for the next couple of years and Australia’s growth outlook was cut significantly. In an endeavour to turn this around central banks have aggressively reduced interest rates to the point that they are so low that there is very little scope to reduce them further in order to stimulate growth. Here in Australia some politicians and economists are arguing for the Government to forget about its preoccupation with achieving a budget surplus (if successful, for the first time in many years) and instead use so called fiscal policy, i.e. inject more money into the economy by accelerating spending on infrastructure and/or social welfare. For now, company profits are expected to suffer a moderate fall not only here but also in the US.
As is our usual position as regards the outlook for investment markets, we try to ignore the short- term gyrations and concentrate on the longer term. Unless you are trying to time the markets, possibly in an endeavour to avoid a probable share market correction, don’t sell your shares, keep your property related growth investments and continue to hold back from investing in very low yielding term deposits. Of course, if you need access to cash in the short to medium term then, investing it in bank accounts or term deposits is the way to go. After all, growth investments are strictly for the longer term, unless you are speculating.