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Patient Investing

The short term outlook for global stock markets is more volatile due to uncertainty about whether US interest rates will rise and severity of the slowdown in China and emerging markets.  Slowing growth is particularly in China’s construction and industrial sectors, which is most inconvenient for Australia as we supply them.  China’s overcapacity will take time to absorb and though there is easing anxiety about China, the overcapacity keeps downward pressure on commodity demand.  Global trade has also slowed and China’s weakness affects its Asian trading partners and emerging markets – sapping the health of the manufacturing sector.

The US is less affected by China than export-oriented economies and is slowly recovering despite uncertainty about a rise in its interest rates – probably not till mid-December or later.  Conversely, with low growth expected to linger for Japan and Europe, they are stimulating growth with easier money policies.   China is also expected to pursue a substantial easy money stance.  Though a stronger US$ affects its exports, the US recovery continues as consumption and especially housing lead modest growth improvements.  Any US rate rises are likely to be slow and prolonged, creating tougher conditions for emerging economies – timing of the first US rise keeps drifting out.  Meanwhile, slow global growth and the prospect of US rates rises puts downward pressure on emerging markets.

Australia’s outlook has been for weak income growth as our mining investment boom unwinds and our terms of trade decline, though the outlook appears to be improving.  The Reserve Bank has kept rates on hold at historic lows despite subdued growth and inflation, with slender prospect of rates easing further – we expect low interest rates for an extended period.  So it is a difficult time for Australia.  The more progressive Federal leadership approach may eventually pull us out of this low growth phase to benefit from our proximity to Asia’s longer term growth.  Continued arrival of new Australians of working age should help, as it has for many decades past.

Despite volatility, international equities have a better earnings growth outlook than ours, with Europe and Asia the best prospects.  Our market offers higher income and might represent better long term value but a difficult year or so may lie ahead.  Meanwhile, our low interest rates support housing and consumption – rates seem unlikely to rise much until 2017.  While we don’t expect a crash, house prices have pushed trend limits for many years now and seem to be leveling.  Business spending is weak but employment and business confidence is improving beyond 2017.  Our A$ may fall further yet, helping exporters and inbound tourism – but making your next overseas trip more expensive.

Index investing seems unlikely to be helpful in this climate and we lean towards active management with a skew to offshore assets.  Volatility and inflation may increase.  Expectations of rising US interest rates depend on improved confidence there.  Meanwhile, investment return expectations may be less than past levels.  During low rate periods is it best to accept lower returns for several years or take on more risk by reducing the interest bearing part of your portfolio?

We find two topics investors are asking about lately are:

  1. Can I earn more than current lousy cash and deposit rates, or must I put up with this for years on some of my portfolio for the capital safety they offer?
  2. Should I invest internationally? Their dividend rates seem much lower than for Australian companies.  Dare I trust that they’ll deliver higher future growth to compensate?

Perhaps you’ve also thought about these topics.  It all comes down to managing risk and taking a ‘total return’ approach.

Overall, global equities seem to have a better outlook, with heightened volatility from concern about China’s slowdown and US interest rates.  Our stock market offers good long term value but slow growth in the short term, with China slowing.  If inflation returns in 3-5 years, how will heavily indebted Australian homeowners and our banks cope?  The sluggish global growth outlook may linger for years and low interest rates will probably take years to rise, meanwhile a skew towards defensive portfolio design seems wise.  As always, success will come from careful asset selection and patience.

One thought on “Patient Investing

  1. Bruce and Carole Jarrett

    The comment is made “As always, success will come from careful asset selection and patience.” Can we get more clarification as to what you are proposing ie. Australian stocks and/or International? To date we have agreed with your recommendations but would like a little more clarification on the direction you will propose.

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