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 – Bitcoin to infinity and beyond... again!

• Bitcoin has made it to new record highs, helped recently by the advent of ETFs that invest directly into it.

• While blockchain technology has promise, the use case for Bitcoin is hard to determine making it impossible to value.

• Bitcoin could have lots more upside if it displaces gold as an independent of government “asset”, but this depends on having faith new buyers will come & pay ever higher prices.

• The key for investors is to recognise that: it’s highly volatile; very speculative; a poor diversifier; & there’s no free lunch.

Read full article

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 Australian home prices up on supply shortfall, but at risk from high rates

The big surprise in the Australian housing market last year was how quickly home prices fell with RBA rate hikes. But the big surprise this year is how they rebounded when most including myself were looking for further falls. October CoreLogic data showed another 0.9% rise in national home prices, leaving them just 0.5% below their April 2022 record.

Key points

– Australian home prices rose again in October, with the supply shortfall on the back of record immigration dominating. Prices are now on track for a 9% gain this year.

– While the supply shortfall is likely to continue there is a high risk that the impact of high interest rates will start to get the upper hand next year particularly if the RBA hikes again and unemployment rises by more than expected.

– Price gains are expected to slow to 5% next year, but the risk of another leg down in prices next year is high.

Please click here to read 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.

Oliver's Insights – For what it’s worth: why what you pay for an investment is a key driver of its return…and how do valuations look now?

The key points are as follows:

• Starting point valuations – like yields and price to earnings ratios – are key drivers of medium-term investment returns.

• For growth assets it’s often more complicated, with the level of interest rates playing a big role.

• At present, valuation starting points for term deposits and bonds have improved. For shares they suggest constrained return potential from US shares but are better for Australia.

Read article

Oliver’s insights – Three reasons to err on the side of optimism as an investor

Introduction

The “news” as presented to us has always had a negative bent, but one could be forgiven for thinking that it’s become even more negative with constant stories of disasters, conflict, wrongdoing, grievance and loss. Consistent with this it seems that the worry list for investors is more threatening and confusing. This was an issue prior to coronavirus – with trade wars, social polarisation, tensions with China, worries about job loss from automation and ever-present predictions of a new financial crisis. Since the pandemic higher public debt, inflation, geopolitical tensions and rising alarm about climate change have added to the worries. These risks can’t be ignored, but it’s very easy to slip into a pessimistic perspective regarding the outlook. However, when it comes to investing the historical track record shows that succumbing too much to pessimism doesn’t pay.

Key points

– The natural human tendency to focus on bad news, the increased availability of information and the rise of social media are magnifying perceptions around worries and making it easier to be pessimistic.

– However, to succeed as an investor it makes sense to err on the side of cautious optimism: otherwise, there is no point in investing; growth assets like shares have trended up over the long term; and trying to get the timing right of the 2 or 3 years out of 10 when they fall can be very hard.

Click here to read the full article.

Oliver's Insights - China's slowdown and structural challenges and implications for Australia

Key points

- China’s economy is slowing not helped by a property collapse and longer-term structural constraints around poor demographics and threats to productivity growth.

- China needs to save less and spend more, and this requires significant fiscal stimulus. So far policy stimulus has been tepid, but a more forceful response is likely.

- Chinese shares are cheap but short-term risks are high.

- The risks around China’s outlook mean Australia can’t rely on the China/commodity boom indefinitely.

Read full article here

Oliver's Insights – Why the need to lift productivity and why it might be hard

Introduction

Outgoing Reserve Bank Governor Philip Lowe has highlighted Australia’s weak productivity growth and noted that boosting it “should be the issue that dominates economic discussion”. So why is boosting productivity so important? And why is it seen as so hard to do? It’s worth having another look at it given its importance to our economy and investment markets.

Key points

- The last 20 years have seen a slump in productivity growth in Australia from over 2% pa to less than 1% pa. This has curtailed growth in living standards and real wages. It will adversely affect asset class returns if allowed to persist.

- Policies to boost productivity growth include: labour market reforms; more skills training; more infrastructure spending; increased housing supply; deregulation; and tax reform.

- Unfortunately, the political pendulum has moved against many of the policies necessary to boost productivity.

Read full article here.