5 Investor Risks Ahead

The last two weeks remind us how the global environment can affect Australia’s prospects and those of our investment markets.  This week we examine 5 global investor risks of concern to Australian investors…

1: Greece

On Sunday, Greece might return to austerity or leave the Eurozone – leaving would be difficult for them but possibly also their cure.  Even if they stay, significant debt may default back to other Eurozone partners.  Does this matter to us here?  On its own, not much.

2: European Contagion

The A$500 billion Greece owes will take some digesting but if heavily written off, its potential to undermine Eurozone neighbors matters more.  Of these, Italy is a major risk as it already owes ~A$4 trillion and a Greek default would add ~A$63billion and we must hope it would not prove indigestible.

3: China

Despite Greece’s dilemma, Australia is much more affected by China’s prosperity.  As it transforms towards its form of socialised capitalism, China’s growing pains result in significant volatility on its property and stock markets.

China’s debt has grown since the GFC and its high economic growth rate has halved in recent years to be slower than they’d like.  Australia’s revenue is directly affected by that slowing growth as it means they spend less on the commodities we sell.  This could get worse if people lose confidence in China’s ability to keep delivering economic growth at above-western-world averages.

In the last few weeks China’s large but rather speculative stock markets have proved extremely volatile as the strong gains over the past year unravelled.  That market surge was driven by retail investors (33 million new accounts last year), often using borrowed money in risky, speculative ways.  Heavy handed Government intervention quelled the slide but the question about China’s future growth remains.

Fortunately, our clients have limited exposure to the ‘materials’ sector compared with the market average.  This together with a focus on quality businesses protect them amid heavy falls in iron ore prices from concern that China’s declining growth may have further to fall.

4: U.S. Interest Rate Cycle

A U.S. cycle of interest rate rises back towards historically neutral levels may soon begin, possibly by December.  This path back to normal after the GFC may test the sustainability of its economic recovery.  We will also see whether this latest expression of China’s faltering growth might delay those interest rate rises further.

5: Australia’s Mortgage Debt & Unsustainable House Prices

Australians’ mortgage debt is as high as any in the world with house prices that may prove unsustainably high.  Those house values underpin the security of Australia’s banks and our national prosperity, driven by policies we should reform.  Our banks are among the most robust in the world but the combination of high individual debt and historically high house prices may prove a problem.  This combined with a lack of policy reform driven by self-inflicted politics on both sides, makes us vulnerable in the event of a recession. Investors might also wonder why Australia encourages property investing above export-oriented enterprise while our “Asian Century’ neighbours are busily overtaking us.

Our biggest test may come in 2017, which might perhaps be when our own Reserve Bank finds it must consider raising interest rates back toward neutral levels.


On their own, each of these risks should be digestible for Australian investors but if they occur in an unfortunate sequence, then some indigestion may arise.  This concern is playing on investor’s minds lately, reducing share prices and renewing interest in safe-haven government bonds.

The main chance is that the world will muddle through this but events may conspire to sap growth and trigger a recession here.   A probability for recession here is difficult to quantify but as a guide, it is perhaps 25% or more.  Overall, the muddle through scenario still seems most likely but having an eye to a recession possibility would be wise.

Uncertain times like these erupt intermittently, reinforcing the value of well-diversified assets.   Those assets include shares in high-quality businesses that demonstrate above average resilience in periods of weakness.  Share markets were fully priced for much of the last year or so and current volatility may offer opportunities to add to your portfolio at more attractive prices.  We think quality matters more than just value.  So we take comfort from the experience of our model Australian Equities portfolio, which generally reflects our clients’ holdings.  For the financial year just ended, it returned 15.5% – compared with the S&P/ASX 200 return of 5.7%.