What in the world is going on?

The Economy & Investment Outlook

Whilst investment markets in the short and even medium term tend to dance to the tune of factors prompted by evolving, often sensational, headlines reflecting a wide range of events of a political and economic nature, the longer term trends and developments ultimately determine their behaviour. But make no mistake, short term and psychological influences can rule the roost for extended periods in ignorance of economic fundamentals. Nevertheless, we can only try to pinpoint some of the factors we think should fundamentally affect investment markets going forward. Here goes:

  • Economic growth slowing further in Australia, continuing higher in USA, slowing in China and virtually stagnant in Europe. It is not often that the outlook is so diverse for the various economies
  • Surplus supply of major commodities relative to demand that might further reduce commodity prices, particularly of iron ore and oil
  • Interest rates at multi-decade lows, tipped to go lower in Australia and gradually increase in the USA
  • The A dollar likely to continue its decline against the US dollar
  • The Australian and developed country international share markets at a relatively high level according to traditional measures of valuation

So, what is the outlook firstly for equity markets given the effect of the above factors as well as many other factors we have not identified or even thought of?
We do think that our Australian share market will continue to climb the proverbial wall of worry, albeit at a more sedate pace than hitherto this year. Yes, it is high but we think that the ultralow level of interest rates is a more powerful influence. Eventually the lower cost of money, low energy costs and inflation will be seen to work to lower the value of the Australian dollar and the cost of business and gradually improve the potential for economic growth, company profits and the Government deficit situation.
This eventual improvement won’t happen quickly but it needs to be remembered that the share market works on anticipated, rather than actual developments.
With the Australian share market making up less than 3% of world markets, and lacking true diversification as it is so focussed on banking and resources companies, the importance of exposure to international markets have come to the fore in recent times. This is obviously magnified by the decline of the A dollar against the US dollar and the expectation that this trend will continue. Whilst the US market in particular is also at an elevated level there certainly is a case for ensuring that Australian investors have such exposure.
For those who are hoping for higher income from bank deposits, we offer no hope into the foreseeable future. It is likely that interest rates will stay lower for longer and only move up when the economy is firmly on the mend again – no moves in anticipation for this asset class.
Residential property seems ridiculously expensive but with interest rates low and likely falling further those with reasonable jobs seem to be able to afford ever larger mortgages. Nevertheless residential property as an investment does not currently seem attractive. However other property as accessed through property trusts, mainly commercial and retail property appears more attractive and generates good yield income.
In summary, we sympathise with the plight of investors seeking the lowest possible level of risk through guaranteed bank deposits in return for hardly any return and we remain optimistic about the prospects for growth investments which carry a higher level of risk. We know from history that in the long term and on average a relatively higher risk posture provides better returns than very low risk exposure but the risk return dilemma is a very individual issue with which investors need to grapple. A more volatile ride is assured for those pursuing higher growth investments.