Published in The Australian 16 March 2017.
With the only certainty of 2017 being uncertainty, investors know that the fundamentals underpinning their portfolio decisions are very different to those that prevailed in recent years.
For a start, the new US administration’s promises of tax reform and an infrastructure-driven stimulus have been very well received by the US sharemarkets, but this will be factored in by the Federal Reserve, which plans to increase rates at least three times this year.
Thus, the secular bull market in bonds is well and truly over.
While the Chinese economy continues its transition from an export and investment-led economy to one based more on services and domestic spending, Beijing’s sustained stimulus efforts are paying off, with output holding up. With better news coming out of Japan and Europe, the global economy shows signs of growth.
Politics, however, continues to pose potential problems for the markets, as it did last year: elections in The Netherlands, France and Germany this year retain the capacity to shock; the Brexit reverberations are not over in Europe; the new Chinese and Russian assertiveness are more evident by the day; and the perennial tinderbox of the Middle East is hotting up again.
Of course, many retail investors would subscribe to the theory of the “Trump Trade”, with the US market up strongly — about 14 per cent on the S&P 500, and about 17 per cent on the Dow Jones — since the election win of Donald Trump in November. But as Alan Kohler, founder of The Constant Investor, and columnist for The Australian points out, the beginnings of the equity markets’ recovery came in the first quarter of 2016, and was driven by China.
“Back then, just about every day there was talk that China’s economy was in trouble because there was too much debt and the economy was slowing and … heading for trouble. But the Chinese government turned that around, through stimulus and that led to the reflation of the world economy that we’re seeing now,” said Kohler. Quite simply, he said, “China is much more important to what’s happening to the world economy than Trump is.”
The critical factor in the US this year, said Kohler, would be the conflict between the White House, which wants to rev up the economy with fiscal stimulus, and the Federal Reserve, which wants to slow the economy down. “My betting is on Janet Yellen and the Fed,” said Kohler. “I think there will be a bigger ramp-up in US interest rates than people expect, which will drive up interest rates around the world. On balance, though, it will be very good for equity markets — but for us, it will drive the Australian dollar lower.”
Bryan Ashenden, head of financial literacy and advocacy at BT Financial Group, told the audience that investors were justified in having a positive outlook, but reminded them that Australian domestic reality would intrude in the near future, with the federal budget only weeks away, and not long after, the start date for the new superannuation rules.
“We’re heading into a really important time for people to actually focus on what is the right decision for their portfolios and retirement income. There might be some structural changes inside your superannuation retirement planning, but it doesn’t mean that you have to take a completely different outlook as to how you invest,” said Ashenden.
Robert Gottliebsen, co-founder of Business Spectator and columnist for The Australian, said the US developments were fascinating, with the Trump administration poised to throw the kitchen sink at the US economy. But while inflation and higher interest rates would ensue, the labour market might not co-operate in delivering Trump the growth he hopes for.
Australian interest rates would not move anywhere near as much as US interest rates, he said. “Our banks will look to boost their margins, so term deposit rates will stay down, but they will try to lift investor rates,” he said.
Like other yield stocks, the banks would face headwinds this year, said Kohler. “They’re an oligopoly, they will lift margins whatever happens with interest rates. They are very well-run businesses, and even with the Australian cash rate staying low, the dividend yields, plus the franking credits, are very good for investors, particularly in self-managed super funds,” he said. While banks may not deliver the capital growth they have done, they still made sense for income-oriented investors.
Gottliebsen identified corporate bonds as an asset class that investors could also use well in a continuing low-rate environment.
Kohler said local investors had to think about offshore exposure, both to hedge against a falling dollar and to get into some of the new energy and technology investments, such as robotics.
“We used to think that the likes of Facebook, Google and Apple were expensive, but the technology revolution means that it’s difficult to apply normal investment rules and principles. You’ve got to be on the train, not on the tracks,” he said.
“Really, with technology, the only opportunity is in America. You haven’t missed those kinds of stocks, because this process has only just begun,” he said. And if you invested in US dollar stocks, you would “probably make money on the currency as well”, he said.
“I think the energy revolution is going to be, if anything, bigger than the digital and telecommunications revolution we’ve seen. Look at tomorrow’s energy, because we’re heading into a big boom there and I think it’s a fantastically interesting time to be an investor,” added Kohler.
Ashenden said investors were trying to find a pathway into these global themes, whether through direct stocks, active managers or exchange-traded funds.
“ETFs could be a ‘starter’ exposure while you gain understanding on where want to put larger investments,” he said.
Gottliebsen said superannuation as an investment vehicle was under threat in the minds of younger investors, who were being tempted by alternative strategies such as negative gearing of residential property. “Don’t be spooked by the 15 per cent super tax rate, and the fact that you don’t get access to your money for a long time — superannuation is still a fantastic way of saving money,” he said.
This information current as at 16/03/2017.
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