Through the Financial Fog

Posted by James Cavanough on 28-Nov-2019 16:05:48
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Through the Fog WebsiteWow, there sure is a lot of noise in the financial media these days. There is nothing like a bit of fear mongering and misuse of information to stir up a bit of chaos and confusion. Is any of this news actually useful and what does it all mean?

A lot of recently published articles on the economy might be ‘newsworthy’, but lack perspective and rarely rationally discuss the long-term implications.

From time to time deeper changes in economic, social and market cycles occur, and it is likely we are in a transitionary phase right now.

A 65-year-old client recently advised me that during the 1960s there was much panic, but after a few years it just went away, and people got on with life. Then, there was the Vietnam War, two prominent assassinations (Luther King and Kennedy), great European suppression e.g. West Germany, emerging IRA activity in the UK, a US tax cut that fuelled expansion, and the beginnings of global inflation leading to new market volatility. But the 1960s heralded new leaderships (Ghandi and Mandela), a successful landing on the moon (innovation) and higher employment and standards of living (markets, economy, health). Also, I was kindly informed there was a very large bush fire back in 1851 (aka Black Thursday), which may have been the largest in Australian history. It burnt half of Victoria and, back then, it was unlikely it had to do with climate change.

So, we need to keep things in perspective and make the best decisions with the information we have. Quality data and regular monitoring is key. Some data is more relevant, but how do you distinguish this? Here is a quick update, using reliable data:

  • Low Cash Rate: The cash rate is currently 0.75%. This is the lowest level ever and is designed to stimulate the economy and investment. It is expected to remain steady, and only time will tell, but this is relatively better than Europe and Japan. You need a good reason to stay in cash, but some holding is sensible.
  • M3 Money Supply: M3 money supply printing will not commence until the cash rate hits 0.25% (announced by the RBA on 26/11/19), rearranging some economist forecasts. The money supply and the inflation rate are correlated. If the money supply increases, the inflation rate will increase. It also acts to determine price of assets and the liquidity of trading assets. This is unlikely to occur, with the RBA putting pressure on the government for fiscal reform.
  • US/AUD Exchange Rate: The current US/AUD exchange rate is $0.68. This is close to a long-term average of $0.65, which is good for exports and income. The rate is expected to remain steady, in line with our relative economic health and interest rates, helping with certainty and trade agreements.
  • Credit Standards: The credit (lending) standards are softening, or normalising, for investment purposes and being closely monitored by APRA. Softening credit standards will generate household confidence as property prices recover.
  • Productivity Reform: Productivity reform has been identified as a high priority for the Federal Government (better late than never), and this is a good thing. The government’s chief productivity adviser, Michael Brennan, has outlined a “fresh agenda” for national economic reform. Watch this space.
  • Dividend Yields: The average dividend yield for ASX shares is 4.2% plus franking credits and is the highest in world. Also, Australia’s investor-friendly taxation system ensures that many shareholders can take advantage of franking credits – tax already paid by a company – to reduce their taxable income or obtain credits. While nothing is certain in the share market, with careful research, by delving deeper into the numbers, you can determine whether you are investing in shares generating sufficient earnings and free cash flow to pay sustainable dividends.
  • Inflation Rate: The country’s inflation rate is currently 1.7%. This could be higher, but it is contained due to excess capacity. This suggests that growth can be sustained before inflationary effects would be felt. We are close to trough conditions and growth is permitted and encouraged.
  • Government Surplus: A government surplus remains attractive for government borrowings. At the end of the last financial year, the Australian government had a net debt of $373.6 billion, which equates to 19.2 per cent of GDP, which is far lower than most advanced economies. Because of its low debt levels and the cheap borrowing rates on offer, Australia has good capacity to manage a crisis. This is responsible behaviour given global uncertainty.
  • Stock Valuations: Most stocks are currently not overvalued and there are pockets of opportunity in emerging markets and industries locally and globally. We can access future leaders, with a good earnings outlook, and position your portfolio to account for growth in industries in 10 or more years time, with less focus on income.
  • Investment Returns: Investment returns are likely to extend further, which is phenomenal. We are still getting wealthier.
  • Recession Risk: Considering all these factors, the risk of recession is currently sitting at a low 30% risk.

Contact us if you wish to discuss any of the points raised in this article. Our job is to provide reliable information to allow effective decisions, monitor and evaluate risks, and provide value-adding ideas across the financial spectrum. The independent advice model is better than ever, even if it’s not particularly newsworthy.

If you would like a review of your situation or know someone that might benefit from an advice relationship, please contact us.

The information contained in this article is of a general nature and does not take into account personal circumstances. Before making any decisions based on the factual information contained in this document please consult with your financial adviser.

Topics: wealth management