The key point is as follows:
My nine most important lessons from investing over the last 40 years: there is always a cycle; the crowd gets it wrong at extremes; what you pay for an investment matters a lot; it’s hard to get markets right; investment markets don’t learn; compound interest is like magic when applied to investments; it pays to be optimistic; keep it simple; and you need to know yourself to be a good investor.
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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.
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The key points are as follows:
CoreLogic data showed national average home prices rose 0.8% in May, their strongest rise since last October.
The housing market remains remarkably resilient with the housing shortage and still solid jobs market providing support, offsetting the downwards pressure on prices from high interest rates and poor sentiment towards housing.
We expect home prices to rise around 5% this year as the supply shortfall continues to dominate, but the pushing out of rate cuts and the possibility of rate hikes along with the rising trend in unemployment pose a key downside risk.
Home price gains are likely to remain widely divergent though with continued strength likely in Perth, Brisbane and Adelaide for now partly helped by interstate migration but softness in other cities, particularly Melbourne.
The key points are as follows:
The run up to the 5th November US election could see increased share market volatility if Trump remains ahead and investors focus on the risks of a new trade war and a hit to the US labour force and to Fed independence under Trump.
In terms of the investment market response to a Trump presidency, much will depend on the relative focus and sequencing of his market friendly policies (lower taxes and less regulation) versus his more market negative policies (to hike tariffs, cut immigration and curtail Fed independence).
Historically, shares have performed better under Democrat than Republican presidents with the best outcome being a Democrat president & Republican House or Senate control.
Australia would be vulnerable to a rapid intensification of trade wars which is looking likely under a Trump presidency.
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.
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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.
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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.
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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.
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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.
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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.
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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.
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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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