Oliver's Insights - China's big stimulus - will it work? And what does it mean for Australia?

After a run of disappointing economic data, collapsing property prices and Chinese shares falling to their lowest since 2019 giving rise to increasing concerns about the outlook, China appears to be moving towards aggressive policy stimulus. But what’s driving the change? Will it work? And what does it mean for investors and Australia?

Key points:

• A move towards more aggressive fiscal policy stimulus and property support measures should help drive a mild cyclical upswing in China’s economy.

• However, it’s doubtful it will be enough to reverse longer term structural problems facing China – around excess saving, demographics and growing state control.

• The Australian economy is less sensitive to China than it used to be, but a stimulus driven cyclical boost to the Chinese economy is still positive for the Australian economy, share market and the $A.

Read full article here.

Oliver's Insights - Will house prices crash? And what's needed to fix housing affordability

Apart from “what will home prices do?" and "where are the best places to buy a property?" the main debate around the Australian housing market has been about poor housing affordability, occasionally interspersed with a scare that home prices will crash. The most recent example of the latter was on 60 Minutes last week with a call by US demographer & economist Harry S Dent that Australian house prices could fall “as much as 50% in the coming years”. But how serious should we take forecasts for a crash? And more fundamentally how do we fix affordability?

Key points:

• Predictions of an Australian house price crash create lots of interest but have been a dime a dozen over the last 20 yrs.

• However, there is more to the surge in property prices than easy money with a supply shortfall being the main factor. Absent much higher interest rates and or unemployment, a house price crash in Australia looks unlikely.

• The key to sustainably improving housing affordability is to boost supply, better align immigration to housing supply, reduce or delay public infrastructure spending, encourage decentralisation and tax reform.

• A failure to boost affordability risks a further slide in home ownership and rising inequality.

Read full article here.

Oliver's Insights - The rise of populism and bigger government - what it means for investors

Key points:

• The continuing rise of populism globally – as evident in recent European elections and in the US with Trump and the Republican party – is signalling an ongoing shift away from economic rationalist policies in favour of greater government involvement in economies and less free trade.

• While extra investment associated with government industrial policies may provide a short-term boost, the risk is high that the rise of populism and a bigger role for government in economies will contribute to more constrained medium-term investment returns.

• Australia is less vulnerable but will still be impacted.

Read full article here.

Oliver's Insights - Australian shares at new record highs - is it sustainable?

It’s often said that shares climb a wall of worry, with good reason. The Australian All Ords price index since 1900 and despite wars, pandemics, and economic calamities, it’s managed to pick itself up and move on to new highs providing solid long term returns for investors.

Key points:

• With Australian shares reaching a new record high we have revised up our slightly our expectations for the ASX 200 this year (from 7900 to 8100) reflecting prospects for lower interest rates globally and eventually in Australia boosting the growth outlook next year.

• But given risks around valuations, near term growth and geopolitics we anticipate a volatile and more constrained outlook with a high risk of a correction in the August to September period, particularly if investors factor in the more negative economic implications of a Trump victory.

Read full article here.

Oliver's Insights - Not another Eurozone crisis! The rise of the far right in Europe, the French election and implications for investors

Since the European Union parliamentary election results were released just over a week ago, seeing a rise in support for far-right parties and French President Macron’s surprise decision to call parliamentary elections, Eurozone shares have had a fall of 4.2%, French shares fell 6.2% and the gap between the French and German 10 year bond yields has increased by 29 basis points indicating that investors are demanding an increased premium to hold French debt. In fact, the gap between French and German 10 year bond yields is back to levels last seen around the 2017 French presidential election. There has also been some flow on to Italian and Spanish bond yields, the Euro and global and Australian shares, although strength in tech shares continued to support US shares.

Key points:

• The success of far-right political parties in EU parliamentary elections & the calling of an election in France have boosted uncertainty by risking a return to the Eurozone crises.

• However, centrist parties still dominate in Europe and support for the Euro is strong.

• Far right success is consistent with a gradual drift towards bigger government & more protectionist economic policies.

• Expect a more constrained and volatile ride from shares.

Read full article here.

Oliver's Insights - The next move in the RBA cash rate likely remains down later this year

It’s now two years since the RBA first started to raise interest ratesresulting in the biggest tightening cycle since the late 1980s. Rates have gone much higher and stayed high for much longer than I thought would be the case as Australian households proved more resilient than expected thanks to a combination of a boost to demand from reopening after COVID, saving buffers, a greater proportion of borrowers on fixed rates and the strongest population growth rate since the early 1950s. So where to now?

Key points:

• While the near-term risks for the RBA cash rate are probably on the upside, the most likely scenario is that the RBA holds rates ahead of rate cuts starting later this year.

• The March quarter US and Australian inflation scare is likely receding, Australian economic growth is very weak, the labour market is cooling & the effective rise in interest rates in Australia has been more than in comparable countries.

Read full article here.

Oliver's Insights - Seasonal patterns in shares - should we "sell in May and go away"?

Coming out of the roughly 10% correction into October last year, share markets saw strong gains on hopes that lower inflation will allow central banks to cut interest rates and as global profits have remained strong. The going seems to have become tougher though with share markets falling in April amidst interest rate and geopolitical concerns begging the question as to whether it’s maybe now time to “sell in May and go away” given the old saying, in reference to seasonal patterns in shares.

Key points:

• Seasonal patterns in shares gave rise to the saying “sell in May and go away, buy again on St Leger’s Day.”

• However, seasonal patterns can’t always be relied on so while investors should be aware of them, betting on them solely to drive investment decisions is not wise.

• We continue to see shares having reasonable returns this year but expect a more constrained & volatile ride over the rest of the year than was the case in the first three months.

Read full article here.

Oliver's Insights - The art of happiness - economics and the "hedonic treadmill"

Key points:

• Despite a big rise in GDP per person, surveyed measures of happiness have been flat to falling in the US and Australia.

• Younger people in the US, Canada, Australia and NZ are the least happy age group. This is a major change from 20 years ago and may be due to the rise of social media.

• Some suggest we are on an “hedonic treadmill” and should focus on something like Gross National Happiness.

• Such as approach would have major implications for investors, but it’s doubtful it would improve happiness.

Read full article here.

Oliver's Insights - Israel/Iran fears and rate cut uncertainty - shares are vulnerable to a bout of volatility but here's five reasons why the trend will likely remain up

From their lows last October, it has been relatively smooth sailing for shares – with US shares up 28%, global shares up 25% & Australian shares up 17% to recent highs. But the last few weeks have seen a rough patch with renewed concerns about interest rates and fears of an escalation in the war around Israel to include Iran (after Iran fired missiles & launched drones at Israel in retaliation for an attack on its consulate in Syria). The obvious issue is how vulnerable are shares? Could the bull market that got under way from the inflation and interest rate lows of 2022 (that has seen global shares rise 42% and Australian shares rise 23%) be over?

Key points:

• After strong gains, shares are vulnerable to a pull back or more volatile/constrained returns than seen so far this year.

• The key threats at present are Iran’s attack on Israel which risks escalating the war in the Middle East, threatening oil supplies, and higher inflation delaying rate cuts.

• Ultimately, we see the trend remaining up for shares.

• The key for investors is to stick to an appropriate long term investment strategy. Trying to time markets is hard.

Read full article here.

Oliver's Insights - Seven things you need to know about the Australian property market

The Australian housing market has started the year on a solid note with national home prices up 1.6% over the first three months according to CoreLogic. We had thought the drag of high mortgage rates would get the upper hand again, but the supply shortfall is continuing to dominate.

Key points:

• The Australian housing market remains far more complicated than optimists and doomsters portray it to be.

• Australian housing is expensive and highly indebted; but it’s very diverse; mortgage arrears remain low; interest rates still matter; but it’s been chronically undersupplied for years; forecasting home prices is very hard; and housing has similar long-term investment returns to shares.

• The surge in immigration is estimated to push the housing shortfall to around 200,000 dwellings this financial year.

• Price gains are expected to be around 5% this year with high rates dragging but the supply shortfall supporting prices. The risks are finely balanced.

Read full article here.

Oliver's Insights - Seven lasting impacts from the COVID pandemic

It’s four years since the COVID lockdowns started. The pandemic ended when it morphed into the less deadly Omicron variant in late 2021, but just as sound can reverberate around a room the effects of the pandemic continue to reverberate in economies. Putting aside the long-term health impacts this note looks at 7 key lasting economic impacts.

Key points:

• Seven key lasting impacts from the Coronavirus pandemic are: “bigger” government; tighter labour markets; reduced globalisation and increased geopolitical tensions; higher inflation; worse housing affordability; working from home; and a faster embrace of technology.

• On balance these make for a more fragmented and volatile world for investment returns. But it’s not all negative.

Read full article here.

Oliver's Insights - 21 great investment quotes

Investing can be scary and confusing at times. But the basic principles of successful investing are timeless and quotes from experts help illuminate these. This note revisits a series on insightful quotes on investing I first started a decade ago.

Key points:

• The aim of investing

• The investment process

• The investment market

• Investment cycles and contrarian investing

• Risk

• Debt

• Investor pessimism

• The right mindset for an investor

Read full article here.

Oliver's Insights - Seven key charts for investors to watch - Where are they now?

Key points:

• Shares have made it to record highs this year but after strong gains are a bit vulnerable to a near term pull back.

• However, we remain upbeat on a 12-month view as falling inflation allows rate cuts and hopefully recession is avoided.

• Seven key charts worth keeping an eye on: global business conditions PMIs; inflation; unemployment and underemployment; inflation expectations; earnings revisions; the gap between earnings yields and bond yields; and the US dollar. so far, most look ok.

Read full article here.

Oliver's Insights - Falling inflation - What does it mean for investors?

Key points:

• Inflation is in retreat thanks to improved supply and cooling demand. A further fall is likely this year.

• Australian inflation remains relatively high - but this mainly reflects lags rather than a more inflation prone economy.

• Profit gouging or wages were not the cause of high inflation.

• The main risks relate to the conflict in the Middle East escalating and adding to supply costs; a surprise rebound in economic activity & sticky services inflation; and floods; the port dispute and poor productivity in Australia.

• Lower inflation should be positive for investors via lower interest rates, although this benefit may come with a lag.

• The world is now a bit more inflation prone so don’t expect a return to near zero interest rates anytime soon.

Read full article here.

Oliver's Insights - 2023 saw the return of Goldilocks, but what's in store for 2024 for investors?

Key points:

• The five key themes for 2023 were: better than feared growth; disinflation; peak interest rates (probably in Australia too); lots of geopolitical threats but not as bad as feared; and AI hit the big time. This boosted shares and helped bonds with solid superannuation fund returns.

• 2024 is likely to see positive returns helped by falling rates but they are likely to be more constrained given likely volatility associated with the high risk of a recession.

• Expect the RBA cash rate to fall to 3.6%, the ASX 200 to rise to 7500 and balanced super funds to return around 5.3%.

• Australian residential property prices will likely see falls as high rates resume their impact after prices rose in 2023.

• Things to keep an eye on: Inflation; interest rates; recession risk; China risks; US politics; and the Australian consumer.

Read full article here.

Oliver's Insights - The RBA leaves rates on hold - have we finally reached the top?

Key points:

• At its December meeting the RBA left rates on hold but retained a tightening bias with still hawkish commentary.

• Our concern remains that the RBA has tightened more than necessary with a high risk of recession next year.

• The risk of another hike rate - which if it occurs would most likely be at the next meeting in February after December quarter inflation date - remains high at around 40%.

• However, our base case is that the RBA has reached the top and we see it cutting rates in second half of 2024.

Read full article here.

Oliver's insights - nine key things for successful investing

Key points

- Successful investing is not always easy and can be stressful. Even in good times. For this reason, it’s useful for investors to keep a key set of things in mind.

- The nine key things are: make the most of compound interest; don’t get thrown off by the cycle; invest for the long term; diversify; turn down the noise; buy low and sell high; beware of the crowd; focus on investments offering a sustainable cash flow; and seek advice.

- These are very important in times like the present when uncertainty around inflation, interest rates, economic activity and geopolitics is high.

Click here to read the full article.

Oliver's Insights - Five constraints on medium term investment returns

Key points

- Five megatrends suggest higher medium term inflation pressures & lower economic growth than pre-pandemic.

- These are: a move away from economic rationalist policies; the reversal of globalisation; rising geopolitical tensions; climate change and decarbonisation; as well as slowing and aging populations. A productivity boost from artificial intelligence should provide some partial offset though.

- But taken together this will likely constrain medium term superannuation returns, potentially to around 5.5% pa.

Click here to read full article.

Oliver's Insights - The threat of higher oil and petrol prices flowing from the war in Israel

Key points:

• The war in Israel has added to the upside risks to oil prices and downside risks to shares in the near term.

• If Iran stays out of conflict & a major supply disruption is avoided the impact on shares should ultimately be minimal.

• If alternatively, oil prices do have a renewed surge it’s more likely to be deflationary as it will act as a “tax on spending”. So central banks, including the RBA, should look through it.

• The rise in petrol prices has already added $12 a week to the average household fuel bill in Australia since May.

Read full article here.

Oliver's Insights - 1987 vs now - Rising bond yields (& war in Israel) and the risks for shares

Key points:

• The rise in bond yields has left shares offering a low risk premium over bonds leaving them at risk of more softness.

• The conflict in Israel has added to the risk, although the threat should be minimal if Iran is not drawn in avoiding a severe impact on oil supplies.

• These are parallels with the run up in bond yields prior to the 1987 crash but relative valuations are less threatening.

• Still falling inflation should take pressure off central banks next year, which should in turn be positive for shares.

Read full article here.