Navigating the investment maze
Matt Drennan writes that Australian investors are having to process often contradictory data as they seek to find their way through the investment maze, but that one factor will be removed when we finally go to the polls on 14 September.
Our financial markets are struggling. Not so much from a performance perspective, although that could always be better, but from trying to process and factor in the contradictory data and comments being thrown into the mix every day.
A bailout package has been agreed for Greece! Hang on, Cyprus looks like it might be going over a cliff ...
US housing prices are picking up! Unemployment is coming down! (Ignore Spain of course, where it is 25 per cent). But what about the US deficit? It’s only a matter of time before the debt ceiling will need to be raised again ...
Global currency wars have hotted up again as Japan decides to print the equivalent of $60 billion in new Yen every month to try and get some inflation back in its economy. This comes on top of the US Treasury’s $80 billon-a-month bond-buying program.
But then there are rumours in the market that Ben Bernanke may be about to pull the pin on the bond-buying program.
With global consumers so heavily indebted, does anyone see a risk all this liquidity might end up in the next asset price bubble? Clearly, the comments from Bill Gross and others suggest it has well and truly hit in bond markets.
Local inflation is well under control, unemployment seems (miraculously) low and economic growth is only a little below trend.
Market pundits consequently weren’t expecting an interest rate cut, but it came anyway. Record low cash rates in Australia ... does the RBA know something the rest of us don’t?
Market pundits are swinging wildly from expecting that further cuts are a fait accompli – to pricing them out altogether.
Or is it, as our Treasurer says, that rates are lower because of the fiscal responsibility being displayed.
We were shooting for a surplus: then the “sledge-hammer” revised that to a $7 billion deficit; some more rhetoric around the stupidity of “mindless austerity”, which translated into a couple of unfunded spending sprees - and suddenly we are at a $19 billion deficit.
But don’t panic, the Government has mapped out “a pathway to surplus” and is “making the smart investments for our future”.
The Aussie dollar has surprised everyone until recently with its resilience in the face of lower commodity prices.
It appears that central banks’ demand for our “safe haven” currency, and the need for global mining companies to fund their massive capex programs to bring new mines on line, have been the main culprits.
Well the good news is we know the mining investment boom has peaked. With the Aussie dollar dipping below parity in the last week, the risk now is that we live out the old adage – ‘up by the stairs but down by the elevator’. Some pundits are forecasting 80 cents. That would not be surprising based on past cycles.
So will the roller-coaster continue?
It’s difficult to see anything but a slow grind for many years in most of core Europe.
The US equity market is at all-time highs, yet Australia, which benefited from a commodities boom, low government debt and no material banking issues, is still struggling at a little over 5000.
The Australian share market continues to struggle when compared to the US and indeed the European markets for two key reasons.
Firstly we haven’t participated in the global currency wars. The massive money-printing exercise in the US and near zero interest rates make holding cash unattractive, and investors are forced to invest in equities if they want any chance of getting positive real returns.
Also, the US market has the additional benefit of having more than fully recovered its pre-GFC earnings per share, and therefore all-time-high prices are more justifiable, despite the weaker relative performance of the economy.
The PE of Australia’s S&P/ASX 200 index is sitting at 17.7x while the S&P 500 is sitting at 15.8x, making our market more expensive on a relative basis, at least on this measure.
Are we seeing the beginnings of a new asset price bubble in US equities? Will it spill over into other markets?
Have Australian equities lagged because of a series of poorly structured government policies, a horribly uncompetitive labour market and a currency which prices us out of the market for foreigner investors?
As Graham Richardson noted recently, September can’t come soon enough. At least then we may have one less issue to deal with.
Matthew Drennan is chief investment officer at SFG Australia Limited.
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