The increasing spread of Coronavirus

February 24, 2020

- The China Coronavirus outbreak has led to concerns of a global pandemic triggering an economic downturn.

- Our base case is that the outbreak will be contained allowing share markets and bond yields to rebound.

- However, uncertainty is high given that the Coronavirus is more contagious than SARS albeit with lower mortality. Key to watch for is a peak in new cases and contained transmission in developed countries.

Bushfires & the Australian Economy

January 08, 2020

- The bushfires are expected to result in around a 0.4% hit to GDP mainly in the March quarter followed by a rebuilding boost.

- The hit to consumer spending and tourism is likely to linger longer.

- The drag on economic activity has increased the pressure for more monetary and fiscal stimulus. We still see the RBA cutting the cash rate to 0.25%.

- The bushfires likely increase the pressure for more action on climate change and highlight the need for investors to be aware of industries and businesses that are vulnerable to climate change risk.

Review of 2019, outlook for 2020

December 04, 2019

- 2019 saw growth slow, recession fears increase and the US trade wars ramp up, but solid investment returns as monetary policy eased, bond yields fell and demand for unlisted assets remained strong.

- 2020 is likely to see global growth pick up with monetary policy remaining easy. Expect the RBA to cut the cash rate to 0.25% and to undertake quantitative easing.

- Against this backdrop, share markets are likely to see reasonable but more constrained & volatile returns, and bond yields are likely to back up resulting in good but more modest returns from a diversified mix of assets.

- The main things to keep an eye on are: the trade wars; the US election; global growth; Chinese growth; and fiscal versus monetary stimulus in Australia.

Investing for income or cash flow

October 14, 2019

- The collapse in interest rates has made it harder for many relying on interest on bank deposits for income.

- These five great charts help illuminate key aspects of investing for income (or cash flow): there are alternatives to bank deposits for income; the gap between yields on different assets provides a guide to relative value; shares can provide stronger growth in income with less volatility than bank deposits; a high and sustainable income yield from an investment provides security; and yield is a guide to future returns.

Australian housing prices back from the abyss

September 10, 2019

- The Australian housing market remains far more complicated than optimists & doomsters portray it to be.

- Yes, it’s expensive and heavily indebted but talk of mortgage stress is overstated & it’s been under supplied.

- The combination of rate cuts, the election and a modest regulatory relaxation have helped turn property prices back up, but the upswing is likely to be constrained.

Measures the RBA may deploy

August 27, 2019

- The RBA is likely to first exhaust conventional easing by cutting the cash rate to 0.5% by year end before deploying unconventional measures beyond forward guidance which is already being used.

- Unconventional monetary policy measures could help the economy, but negative interest rates are unlikely and quantitative easing would be most effective and fairest if combined with fiscal stimulus.

- For investors it means low interest rates for even longer.

2018-19 Saw a rough ride for investors

July 01, 2019

- 2018-19 saw solid returns for diversified investors, helped by a sharp rise in share markets in the last six months & solid returns from most assets, except cash. 

- Key lessons for investors from the last financial year were to: turn down the noise around investment markets, maintain a well-diversified portfolio; and cash continues to provide low returns. 

- A pick-up in global growth, renewed monetary easing, an absence of significant economic excess globally and okay equity valuations should support returns over the year ahead. But they are likely to be constrained with bouts of volatility as the US trade conflict impacts and risk remains around the Australian property market. 

Australian growth will be constrained

June 17, 2019

- Australian growth is likely to be weak over the next year or so and this will prompt further monetary easing and fiscal stimulus. 

- However, several positives suggest recession is unlikely: the current account deficit has collapsed; the $A helps stabilise the economy; the drag from falling mining investment is over; there is scope for extra fiscal stimulus; infrastructure spending is booming; there has been no sign of panic property selling; economic policy remains sensible; population growth remains strong; and the RBA can still do more. 

Seasonal Patterns in Shares

May 05, 2019

- Seasonal patterns typically see shares do well from around November to May and not so well from May to November. This partly reflects a combination of tax loss selling in the US, new year cheer and the pattern of capital raising through the year. 

- While we see shares doing well this year, right now they are vulnerable to a short-term pull back after strong gains since December. Renewed trade fears obviously don’t help. 

The 2019 Australian Federal Election & Investors

April 16, 2019

- Australian elections tend to result in a period of uncertainty which have seen weak gains on average for shares followed by a bounce once it’s out of the way. 

- With Labor promising higher taxes, larger government and more intervention in the economy the May election presents a starker choice than has been the case since the 1970s & so suggests greater uncertainty than usual. 

- Labor’s higher tax and regulation agenda may be a negative for Australian assets, but this could be partly offset in the short term by more targeted fiscal stimulus. 

- To return to decent wage gains requires a productivity enhancing reform agenda & much lower unemployment. This election is unlikely to deliver much on the former. 

Australia slides in to a 'per capita recession'

March 05, 2019

- Australian growth slowed even more in the December quarter. Growth may bounce back a bit this year, but the housing downturn will likely constrain it to around 2-2.5%. 

- As a result, unemployment is likely to drift up and wages growth and inflation remain lower for longer. 

- The RBA is on track to cut rates this year and the housing downturn will likely see Australian shares continue to under perform global shares. 

Why I Still Love Dividends

February 26, 2019

- Dividends are great for investors. They augur well for earnings growth, provide a degree of security in uncertain times, are likely to comprise a relatively high proportion of returns going forward and provide a relatively stable source of income. 

- Including reinvested dividends, the Australian share market has surpassed its 2007 record high. 

- It’s important that dividend imputation is not weakened in Australia to ensure dividends are not taxed twice. 

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