All I Want for Christmas…
by Scott Brodie
It’s nearing Christmas, which means it’s 12 months since I wrote my updated article about the need to continue to look back and understand the path traveled, that has brought us to the present when trying to forecast the future. I wrote of the enduring impact of the 2008 financial crisis and the post 2008 financial crisis world of low interest rates, quantitative easing and the impact of this on our preparedness to accept historic low yield on asset acquisitions. My view was that it was a good time to consider liquidating marginal assets as the cycle was turning.
The Present Situation
Well 12 months on and the cycle has not turned. In fact we now find interest rates both domestically and internationally low and going lower. In Australia, we have witnessed three 25 basis point cuts by the Reserve Bank to its rate which now stands at 0.75%. Down from a historically low 1.5% at the start of the year. Further, there is an expectation that the Reserve will drop the rate by a further 25 basis points to 0.5% in February 2020, as the outlook for Christmas retail spending is weak.
Although Australia is not technically in recession, no or low wages growth, high levels of household debt, a drop in residential real estate values and a lack of consumer confidence has pushed the retail sector towards recession. Like most first world western economies, economic activity, economic growth and jobs that flow from it is heavily dependent on consumption.
The outlook is not only for rates to reduce further, but the general consensus is they will remain low for at least the medium term with little confidence espoused by forecasters on when this trend will start to reverse and what will be the driver.
Impact in Europe
I spent time in Italy, Switzerland, France and the UK during the year, and tough economic times are also being felt in Europe. Globalisation, Brexit, disruption and resistance to chance are having a negative impact on these “traditional” and heavily populated European centres. There is very high unemployment in regional and country areas with the trend worsening over time. This has and will lead to further political instability and the rise of dangerous nationalistic dogma.
Movements in Australia
By contrast, Australia is in a far better position to weather this storm. We have a small population which is growing in excess of 160,000 from our mainly skilled base immigration policy. State and federal governments have committed very large amounts of their budgets to infrastructure projects, to make our major cities and urban areas more liveable, as they cater for larger populations. Though much of this spend should have been part of a systematic program undertaken over the last 30 years, as opposed to the more recent massive, less efficient spread of large scale programs. The upside however, is this expenditure is driving the Australian economy while it is being buffered by international head winds.
Steps You Can Take Now
It is a good time to stress test your business and investment cash flow, and determine how exposed your financial position is to a sudden downturn or even recession. For example, if your income is substantially exposed to the health services sector or infrastructure construction, you should be less effected by a sudden downturn or recession than if your income is substantially exposed to the real estate, financial services or retail sectors.
So unlike “aging” northern hemisphere western economies, Australia is and will continue to grow. In an extended period of low interest rates going lower with no identifiable driver to move rates up in the medium term, if your financial stress test provides you with the confidence to weather short term unexpected downturns, it’s a great time to take on manageable risk positions and acquire quality assets. Property and equities both have limited supply, and as investors, particularly self-managed superannuation funds, reduce their exposure to cash and chase yields, demand and price of property and equities will increase.
Whatever you acquire, it will appear expensive but in these times of extended low interest and inflation, you need to adapt your expectations of risk and return. What remains consistent is you maximise your risk management position by investing in quality assets. If it walks like a duck, quacks like a duck… guess what?
Hope Santa fills your Christmas stocking with exciting opportunities for the new year.