Courtesy of Nucleus Wealth’s Damien Klassen. Damien runs the investment side of Nucleus, selecting stocks suggested by analysts and implementing the asset allocation
Every quarter I like to look at the changes in Australian GDP
and which categories are responsible for the growth / decline. Each
bubble represents a category of GDP proportionate to its size, colours
represent the growth rate.
Click the charts for a large version and commentary:
This quarter the key takeaways include:
Federal Government spending (+11% for non-defence, 7% for defence over the year) the only thing keeping GDP above zero.
Investment
growth was not good, but I was expecting worse. Possibly there are
green shoots, but capex surveys and investment forward indicators
suggest there is still more downside.
State & Local
government spending has turned negative – with a low number of property
transactions this is likely to remain a feature
Australian retail turnover was relatively unchanged (0.0 per cent) in October 2019, seasonally adjusted, according to the latest Australian Bureau of Statistics (ABS) Retail Trade figures. The retail recession continues, and now the question becomes, will the summer holidays and Christmas change anything ahead?
This follows a rise of 0.2 per cent in September 2019.
“There were falls for clothing, footwear and personal accessory retailing (-0.8 per cent), department stores (-0.8 per cent) and household goods (-0.2 per cent),” said Ben James, Director of Quarterly Economy Wide Surveys.
“These falls were offset by rises in cafes, restaurants and takeaway food services (0.4 per cent) and food retailing (0.1 per cent). Other retailing was relatively unchanged (0.0 per cent).”
In seasonally adjusted terms, there were mixed results across the states. Victoria (-0.4 per cent), New South Wales (-0.2 per cent), and South Australia (-0.5 per cent) fell, while Queensland (0.4 per cent), Tasmania (1.4 per cent), the Northern Territory (2.3 per cent), Western Australia (0.2 per cent), and the Australian Capital Territory (0.3 per cent) rose in seasonally adjusted terms in October 2019.
The trend estimate for Australian retail turnover rose 0.2 per cent in October 2019, following a 0.2 per cent rise in September 2019. Compared to October 2018, the trend estimate rose 2.3 per cent.
The Reserve Bank will consider quantitative easing once rates fall to 25 basis points. It’s a tool that has been used by other countries, often with devastating consequences for society. Via InvestorDaily.
Australia
is in uncharted territory, economically speaking. We’re latecomers to
the low-rate party and we’re still getting used to it. Home owners are
loving it but retailers are not. Unemployment is low but a record number
of Aussies want to work more. It’s a strange time.
The Reserve
Bank of Australia only has a few options left if it fails to hit its
inflation target and lift economic growth. It can continue to reduce the
cash rate and even go into negative rates, as the European Central Bank
(ECB) had done. The ECB benchmark deposit rate was cut by 10 basis
points in September to negative 0.5 per cent. The ECB also reintroduced
its quantitative easing program of buying 20 billion euros ($32 billion)
worth of government and corporate bonds every month in an effort to
prevent the European economy from sliding off a cliff.
The ECB
has been using QE on and off since 2009 in an effort to lift inflation.
In 2015 the central bank began purchasing 60 billion euros worth of
bonds each month. This increased to 80 billion euros in April 2016
before coming back down to 60 billion a year later.
In the UK,
the Bank of England bought gilts (British government bonds) and
corporate bonds during its QE program during the global financial crisis
in 2009. QE programs also took place in 2011 and 2016.
Meanwhile,
the US Federal Reserve has undertaken three separate rounds of QE, the
last of which it began tapering in June 2013. The US halted its program
in October 2014 after acquiring a total US$4.5 trillion of assets.
When
a QE program takes place, a central bank begins buying securities with
money that didn’t exist before the QE process began. They are
essentially printing money and giving it to large corporates and the
government through the purchase of these bonds, the logic being that the
proceeds will be used to buy new assets (like mortgages) and invest,
which in turn will drive the economy.
The money doesn’t directly
hit the wallets of consumers. Unlike “helicopter money”, which the Rudd
government dished out during the financial crisis, QE has a much more
indirect impact on consumers. Financially speaking.
But the broader political and social impacts have had a lasting psychological effect on the populations of Europe and the US.
“If
we look at the experience offshore, QE has been great at raising the
level of assets in conjunction with a permanently lower interest rate,”
Fidelity International’s Anthony Doyle said this week.
“QE has
stimulated asset price growth. The ‘haves’ have benefited compared to
the ‘have nots’; income inequality has grown across the economies that
have implemented quantitative easing and socially we have seen big
shifts to the Right or to the Left in terms of the political spectrum.
“If
you think about Donald Trump, Elizabeth Warren, Bernie Sanders, Jeremy
Corbyn, Brexit, Boris Johnson. The next decade could be characterised by
moves to the Right or Left here as well if we follow a path that other
economies have pursued.”
AMP Capital chief economist Shane Oliver
told Investor Daily that QE “probably helps people who have shares and
property more than it does people who have bank deposits.”
Prior
to the election of Mr Trump in 2016, Luis Zingales of the University of
Chicago Booth School of Business told Bloomberg that central bank
policies are largely to blame for the rise of populism.
Here in
Australia, the Reserve Bank will have to consider the impact that QE
could have on a society that has witnessed a banking royal commission
that exposed widespread misconduct within the financial services
industry.
If the impact on Europe and the US of QE on the people
is anything to go by, Australia is well placed to split down the middle
and begin gathering on the far edges of the political spectrum.
We were late to the low rate party. We might just be late to the populism party too.
Australians saved rather than spent most of the budget tax cuts, almost doubling the proportion of household income saved, leaving spending languishing. Via The Conversation.
The September quarter national accounts show that in the first three months of the financial year real household spending grew by just 0.1%, the least since the global financial crisis.
Over the year to September, inflation-adjusted spending grew by a
mere 1.2%, also the least since the financial crisis. Australia’s
population grew by 1.6% in that time, meaning the volume of goods and
services bought per person went backwards.
Quarterly growth in household spending
Separate figures released by the Federal Chamber of Automotive Industries on Wednesday show November new car sales were down 9.8% on November 2018.
By the end of November the Tax Office had issued more than 8.8.
million tax refunds totalling A$25 billion, 30% more than a year before.
Instead of being largely spent, they were mostly saved, pushing up
the household saving ratio from 2.7% to 4.8%, its highest point in more
than two years.
Household saving ratio
Treasurer Josh Frydenberg put the best face on the result, saying
whether they had been spent or saved, the cuts had put households in a
stronger position.
The government’s goal has always been to put more money into the
pockets of the Australian people, and it’s their choice as to whether
they spend or save that money
Separately calculated retail figures show that in the three months to September the volume of goods and services bought fell 0.1%.
The disposable income households had available to spend grew an
outsized 2.5%, driven by what the Bureau of Statistics said were the budget tax cuts.
Growth at GFC lows
The Australian economy grew just 0.4% in the three months to
September, down from 0.6% in the June quarter, and 0.5% in the March
quarter.
Over the year to September it grew 1.7%, well short of the budget forecasts, which in year average terms were 2.25% for 2018-19 and 2.75% for 2019-20.
Real GDP growth
After taking account of population growth, GDP per person grew not at
all in the September quarter. Over the year to September living
standards grew a bare 0.2%.
Gross domestic product per hour worked, which is a measure of
productivity, fell 0.2% during the quarter and fell 0.2% over the year.
Company profits were up 2.2% in the quarter and 12.7% over the year.
Wage and superannuation payments grew at about half those rates: 1.2%
and 5.1%.
Housing investment was down 1.7% over the quarter and 9.6% over the year.
What household spending growth there was was concentrated on
essentials, led by health and rent. So-called discretionary or
non-essential expenditures fell, led down by spending on cars, dining
out and tobacco.
Consumption growth by category, quarterly
The economy was kept afloat by a surge in government spending. It
grew 0.9% in the quarter and 6% over the year. Growth in government
spending and investment together accounted for 0.3 of the quarter’s 0.4
points of economic growth.
Government and mining to the rescue
Mining production grew 0.7% over the quarter and 7.4% over the year. A
mining-fuelled surge in exports (which eclipsed imports for the first
time since the 1970s) contributed almost as much to economic growth as
government spending.
Drought-affected farm production fell 2.1% over the quarter and 6.1% over the year.
Business investment fell 4% in the quarter and 1.7% over the year,
led down by a 7.8% fall in mining investment in the quarter and a 11.2%
fall over the year, as liquefied natural gas projects came to
completion. Non-mining investment fell 0.4%.
Asked whether the December budget update would contain tax measures
designed to boost business investment, the treasurer said he was in
discussions with business. The update is expected in the week before
Christmas.
There’s little evidence in today’s figures of the “gentle turning point” spoken about hopefully by the Reserve Bank governor as recently as Tuesday.
If things don’t pick by the bank’s first board meeting for the year in February, it is a fair bet it will cut its cash rate again. By then it will know what the treasurer did (or didn’t) do in the budget update and whether we decided to spend over Christmas.
Author: Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University
Slowing global economic growth, trade tensions and geopolitical risks will lead to subdued demand growth in global shipping in 2020, Fitch Ratings says in a new report. The sector outlook remains negative. Although all shipping segments have demonstrated more prudent capacity growth in recent years, which supported a better supply-demand balance, a longer record of responsive capacity management is needed to improve the sector’s resilience.
Free global trade is vital for shipping
as about 80% of world trade in goods is carried by the international
shipping industry. The main sector risk is that protectionist measures
may escalate into a protracted trade war and damage the prospects for
global trade and GDP growth. While some upside is possible if the trade
tensions between the US and China ease, the downside risks, including
expected slower GDP growth in China, soft trade growth and Brexit
uncertainty, will continue to weigh on demand.
The sector will
also need to cope with rising costs related to new regulation capping
sulphur content in marine fuel (International Maritime Organisation
(IMO) 2020), which is likely to negatively affect shippers’ credit
metrics. This regulation will probably increase operating costs (if
shippers choose to use more expensive low-sulphur fuel) and/or capex (if
they install scrubbers that remove sulphur from the exhaust or purchase
new LNG-fuelled vessels). Shippers are unlikely to fully pass through
all the associated costs to customers due to their limited bargaining
power in the oversupplied market. We expect most shipping companies to
use low-sulphur fuel.
We forecast global container volumes to
grow by about 2.5% in 2020. While this represents a small increase from
2019, it is well below the average growth rate of about 4.5% over the
past eight years. Trade restrictions, if they remain unresolved, are
likely to have a negative impact on global container volumes of about 1%
in 2020, according to AP Moller-Maersk. We expect better capacity
management in global container shipping with fleet capacity increasing
by 3.3% in 2020, slower than 3.6% in 2019. Container freight rates in
2020 are likely to remain at levels similar to those in 2019.
We
expect dry-bulk trading volumes to grow by 3% in 2020, up by more than
1.5pp on 2019. This improvement will be driven by higher iron ore and
other commodities volumes. Iron ore volumes are expected to slowly
recover following the Vale dam incident in Brazil and challenging
weather at Australian ports in 2019. Fleet additions are likely to match
this growth in volumes, and freight rates are likely to increase as
dry-bulk shippers will be better positioned to pass on some of the
higher fuel costs.
Global tankers’ supply and demand are likely
to grow by 2.5% and 3.5%, respectively, in 2020, supporting a better
supply-demand balance. This will help freight rates to stay at levels
comparable to annual averages in 2019, which represents a recovery from
their troughs in the middle of 2018. The impact of IMO 2020 on tanker
shipping companies is likely to be mixed, as rising compliance costs may
be mitigated by increased tanker demand to transport compliant fuel.
However, lingering trade and geopolitical tensions and political risk
may depress long-term tanker demand
Saxo
Bank, a leading global
multi-asset facilitator of capital markets products and services, has today
released its 10 Outrageous
Predictions for 2020. The
predictions focus on a series of unlikely but underappreciated events
which, if they were to occur, could send
shockwaves across financial markets.
While these predictions do not
constitute Saxo’s official market forecasts for 2020, they represent a
warning of a potential misallocation of risk among investors who typically see
just a one percent likelihood to these events
materialising. It’s an exercise in considering the full extent of
what is possible, even if not necessarily probable. Inevitably the outcomes
that prove the most disruptive (and therefore outrageous) are those that are a
surprise to consensus.
Commenting
on this year’s Outrageous Predictions, Chief Economist at Saxo
Bank, Steen Jakobsen said:
“This
year’s Outrageous Predictions all play to the theme of disruption, because our
current paradigm is simply at the end of the road. Not because we want it to
end, but simply because extending the last decade’s trend into the future would
mean a society at war with itself, markets replaced by governments, monopolies
as the only business model and an utterly partisan and a highly fragmented and
polarised public debate.
“It’s
an environment where negative yields are now used to discriminate against
access to mortgages for low income households, the elderly and students as
regulatory capital requirement demands make credit hurdles too high for that
group to get credit. Instead, they rent at twice the price of owning –
a tax on the poor if ever there was one, and a driver of inequality. This,
in turn, risks leaving an entire generation without the savings needed to own
their own house, typically the only major asset that many medium and lower
income households will ever obtain. Thus, we are denying the very economic
mechanism that made the older generations ‘wealthy’ and risk driving a
permanent generational wealth gap.
“We
see 2020 as a year where at nearly every turn, disruption of the status quo is
an overriding theme. The year could represent one big pendulum swing to
opposites in politics, monetary and fiscal policy and, not least, the
environment. In politics, this would mean the sudden failure of populism,
replaced by commitments to “heal” instead of to divide. In policymaking, it
could mean that central banks step aside and maybe even slightly normalise
rates, while governments step into the breach with infrastructure and climate
policy-linked spending.”
The Outrageous Predictions
2020 publication is available here with headline
summaries below:
1. Australia’s
nominal GDP to 8% on MMT
In 2020, economic red
flags point to more downside ahead for the Australian economy. In Q1 of 2020,
retail sales and cash register activity plunge to their lowest level since the
1991 recession and houses become more unaffordable, with Sydney and Melbourne
being ranked among the world’s most expensive cities for housing. In
Australia’s five biggest cities, more than 30% of average earnings are absorbed
by mortgage repayments, leading to lower consumption and higher consumer
stress.
The Australian economy
could get a lift from the improving China credit impulse next year, but it is
unlikely to be a game-changer as China’s credit transmission is still too slow.
On the top of that, domestic monetary policy is also constrained as the effective
zero-bound approaches and has limited positive effects on the real economy. RBA
governor Philip Lowe was very vocal in 2019 on the limits of monetary policy
and repeatedly explained that further rate cuts have only a marginal effect on
GDP growth — arguing that fiscal stimulus is the only way to bring relief if
the economy continues to weaken.
As consumer confidence
and employment begin to plunge in early 2020, the government decides to embark
on an MMT-inspired economic policy aimed at restoring confidence, stimulating
GDP growth and attracting investment. This is the largest fiscal stimulus
programme in Australia for at least 30 years. It leads to a massive increase in
public spending in infrastructure, the health system and education, as well as
the implementation of ambitious programmes to reduce the cost of living,
provide affordable housing, reduce taxation and address environmental issues.
The strong rise in
fiscal spending contributes to a jump in consumption and investment, almost
doubling Australia’s nominal GDP rate to 8% in 2020. The business community
applauds this bold new economic policy stance. Confidence and risk appetite are
back. After being hit by a perfect storm that drove the Australian dollar down
nearly 20% versus the greenback since early 2018, the AUD is among the best
performing currencies in 2020.
2. The
sudden arrival of stagflation rewards value over growth
The iShares MSCCI World
Value Factor ETF leaves the FANGS in the dust, outperforming them by 25%.The
world has now come full circle from the end of the Bretton Woods system, when
it effectively shifted from a gold-based USD to a pure fiat USD system, with
trillions of dollars borrowed into existence — not only in the US but all over
the world. Each credit cycle has required ever lower rates and greater doses of
stimulus to prevent a total seizure in the US and global financial system. With
rates at their effective lower bound, and the US running enormous and growing
deficits, the incoming US recession will require the Fed to super-size its
balance sheet beyond imagination to finance massive new Trump fiscal outlays to
bolster infrastructure in hopes of salvaging his election chances. But a
strange thing happens: wages and prices rise sharply as the stimulus works its
way through the economy, ironically due to the under-capacity in resources and
skilled labour from prior lack of investment. Rising inflation and yields
in turn spike the cost of capital, putting zombie companies out of business as
weaker debtors scramble for funding. Globally, the USD suffers an intense
devaluation as the market recognises that the Fed will only accelerate its
balance sheet expansion while keeping its policy rate punitively low.
3. ECB
folds and hikes rates
European banks on the
comeback trail as the EuroStoxx bank index rises 30% in 2020.Despite the recent
introduction of the tiering system, which has helped to mitigate the negative
consequences of negative rates, banks are still facing a major crisis. They are
confronted with a challenging economic and financial environment: marked by
structurally ultra-low rates, an increase in regulation with Basel IV — which
will further reduce the banks’ ROE — and competition from fintech companies in
niche markets. In an unprecedented turn of events, in early January 2020, the
new president of the ECB, Christine Lagarde — who has previously endorsed
negative rates — executes a volte-face and declares that monetary policy has
overreached its limits. She points out that maintaining negative deposit
interest rates for a longer period could seriously harm the soundness of the
European banking sector. In order to force euro area governments, and notably
Germany, to step in and to use fiscal policy to stimulate the economy, the ECB
reverses its monetary policy and hikes rates on January 23, 2020. This first
hike is followed by another a short time later that quickly takes the policy
rate back to zero and even slightly positive before year-end.
4. In energy, green is not the new
black
The ratio of the VDE
fossil fuel energy ETF to ICLN, a renewable energy ETF, jumps from 7 to 12. The
oil and gas industry came roaring out of the financial crisis after 2009,
returning some 131% from 2008 until the peak in June 2014 as China pulled the
world economy out of its historic credit-led recession. Since then, the
industry has been hurt by two powerful forces. The first was the advent of US
shale gas and rapid strides in globalising natural gas supply chains via LNG.
Then came the US shale oil revolution, which saw the US become the world’s
largest oil and petroleum liquids producer. The second force has been the
increasing political and popular capital behind fighting climate change,
causing a massive surge in demand for renewable energy. The combined forces of lower
prices and investors avoiding the black energy sector have pushed the equity
valuation on traditional energy companies to a 23% discount to clean energy
companies. In 2020, we see the tables turning for the investment outlook as
OPEC extends production cuts, unprofitable US shale outfits slow output growth
and demand rises from Asia once again.And not only will the oil and gas
industry be a surprising winner in 2020 — the clean energy industry will
simultaneously suffer a wake-up call.
5.
South Africa electrocuted by ESKOM debt
USDZAR rises from 15 to
20 as the world cuts credit lines to South Africa. The very bad news is the
South African government announcement late this year that in order to continue
to bail out troubled utility ESKOM and keep the nation’s lights on, the budget
next year is projected to balloon to its worst in over a decade at 6.5% of GDP,
a sharp deterioration after the government managed to stabilise finances at a
near constant -4% of GDP for the last few years. Worse still, the World Bank
estimates that its external debt has more than doubled over that period to over
50% of GDP. The ESKOM fiasco may be the straw that will break the back of
creditors’ willingness to continue funding a country that hasn’t had its
financial or governance house in order for decades. Other uncreditworthy EMs
will be drawn into the abyss as well in 2020, with the most differentiated
performance across EM economies in years. The country teeters toward default.
6. US
President Trump announces America First Tax to reduce trade deficit
A tax on all
foreign-derived revenue scrambles supply lines and spikes inflation. US 10-year
inflation-protected treasuries yield 6% in 2020 thanks to a rush of investor
interest as the CPI rises. The year 2020 starts with reasonable stability on
the trade policy front after the Trump administration and China manage at least
a temporary détente on tariffs, currency policy and purchases of agricultural
goods. But early in 2020 the US economy struggles for air and US trade deficits
with China fail to materially improve, while Chinese purchases of agricultural
products can’t realistically increase further. Eyeing polls showing a
resounding defeat in the 2020 US Presidential election, Trump quickly grows
restive and his administration drums up a new approach in a last-ditch effort
to steal back the protectionist narrative: the America First Tax. Under the
terms of this tax, the US corporate tax schedule is completely reconstructed to
favour US-based production under the claimed principles of “fair and free trade”.
The plan cancels all existing tariffs and instead slaps a flat value-added tax
of 25% on all gross revenues in the US market that are sourced from foreign
production. This brings stinging protests from trading partners for what are
really just old tariffs in new clothes, but the administration counters that
foreign companies are welcome to shift their production to the US to avoid the
tax.
7.
Sweden breaks bad
A massive and pragmatic
attitude shift washes over Sweden as it gets to work to better integrate its
immigrants and overstretched social services, driving a huge fiscal stimulus
and steep rally in SEK. As often seems the case in Swedish policymaking, just
as they took progressive taxation too far and collapsed the economy in the
early 90’s, they have now taken political correctness on immigration so far
that they have become politically incorrect. They are ignoring the large and
growing contingent of Swedes who are questioning that policy, shutting them out
of the debate. A parliamentary democracy should allow all groups of reasonable
size a voice in the debate, but the traditional main parties of Sweden have
taken the unusual collective decision to ignore the anti-immigration voice
which has grown to represent more than 25% of the Swedish voters. The
justification and intentions were good: openness and equality for all and
safeguarding the Swedish open economic model. But anything taken too far can
overwhelm, and to survive, all models need to be able to change when facts
change. The other Nordic countries now talk of “Sweden conditions” as a threat,
not as a model of best practice. Sweden is now in recession and with its small
open economy status is extremely sensitive to the global slow down. This sense
of crisis, social and economic, will create a mandate for change.
8.
Democrats win a clean sweep in the US 2020 election, driven by women and
millennials
The 2020 US election
puts the Democrats in control of the presidency and both houses of Congress.
Big healthcare and pharma stocks collapse 50%. The polls going into 2020 don’t
look promising for Trump, and neither does the electorate. The marginal Trump
voter in 2016 and in 2020 is old and white, a demographic that is fading in
relative terms as the largest generation in the US now is the maturing
millennial generation of 20-40-year-olds, a far more liberal demographic.
Millennials and even the oldest of “generation Z” in the US have become
intensely motivated by the injustices and inequality driven by central bank
asset market pumping and fears of climate change, where President Trump is the
ultimate lightning rod for rebellion as a climate change denier. The vote on
the left is thoroughly rocked by dislike of Trump – with suburban women and
millennials showing up to express their revulsion for Trump. The Democrats win
the popular vote by over 20 million, grow their control of the House, and even
narrowly take the Senate. Medicare for all and negotiations for drug pricing
bring a massive haircut to the industry’s profitability.
9.
Hungary leaves the EU
Hungary has been an
impressive economic success since it joined the EU in 2004. But the 15-year
marriage now seems in trouble after the EU initiated an Article 7 procedure
against the country, citing Hungary’s – or really PM Orbán’s — ever-tighter
restrictions on free media, judges, academics, minorities and rights groups.
The push back from Hungary’s leadership is that the country is only protecting
itself: mainly protecting its culture from mass immigration. It’s an
unsustainable status quo, and the two sides will find it tough to reconcile in
2020 as the Article 7 procedure moves slowly through the EU system. PM Orbán is
even openly talking about how Hungary is a ‘blood brother’ with the renegade
Turkey as opposed to a part of the rest of Europe, a big shift in rhetoric, a
change of tone which coincides with EU transfers all but disappearing over the
next two years. Hungary’s currency, the forint (HUF) is on the back foot and
reaches a much weaker level of 375 in EURHUF terms as the markets fear the
disengagement or reversal of capital flows as EU companies reconsidered their
investment in Hungary.
10.
Asia launches new reserve currency in move away from US dollar dependence
An Asian, AIIB-backed digital reserve currency
takes the US dollar index down by 20% and tanks the US dollar 30% versus gold.
To confront a deepening trade rivalry and vulnerabilities from rising US
threats to weaponise the US dollar and its control of global finances, the
Asian Infrastructure Investment Bank creates a new reserve asset called the
Asian Drawing Right, or ADR, with 1 ADR equivalent to 2 US dollars, making the
ADR the world’s largest currency unit. The move is clearly aimed at
de-dollarising regional trade. Local economies multilaterally agree to begin
conducting all trade in the region in ADRs only, with major oil exporters
Russia and the OPEC nations happy to sign up due to their growing reliance on
the Asian market. The redenomination of a sizable chunk of global trade away
from the US dollar leaves the US ever shorter of the inflows needed to fund its
twin deficits. The USD weakens 20% versus the ADR within months and 30% against
gold, taking spot gold well beyond USD 2000 per ounce in 2020.
Fidelity International cross-asset specialist Anthony Doyle has warned that the returns over the next decade won’t be anything close to the stellar performance seen over the last 10 years. Via InvestorDaily.
During
a media briefing in Sydney on Tuesday (3 December), Mr Doyle said 2009
to 2019 has been a “phenomenal decade” for Australian investors.
However, he said that he would be shocked if “we generated anywhere near
these returns” over the coming ten years.
“Particularly for a
balanced fund, for example, the default option for most Aussie super
funds. The returns over the next decade are unlikely to be anything like
what we have seen over the past decade.”
The fund manager
explained that lower returns are the result of a record-low cash rate
and that investors are now having to move further down the risk curve in
order to find returns that were once generated by defensive assets like
cash. He also warned that the miracle of compound interest could soon
be a thing of the past in a low-rate environment.
“Something has
gone seriously wrong in the economy,” Mr Doyle said. “After 28 years of
uninterrupted economic growth, the commodities boom, low unemployment, a
fiscal surplus and a current account surplus for the first time in
years, our cash rate is the same as the Bank of England’s. The fact that
our cash rate is the same as the UK’s tells me something has gone wrong
in the Australian economy.”
Hours
after Mr Doyle’s presentation the RBA left the official cash rate on
hold at its final meeting of the decade. Governor Philip Lowe noted that
interest rates are very low around the world and a number of central
banks have eased monetary policy over recent months in response to the
downside risks and subdued inflation.
“Expectations of further monetary easing have generally been scaled back,” he said.
“Financial
market sentiment has continued to improve and long-term government bond
yields are around record lows in many countries, including Australia.
Borrowing rates for both businesses and households are at historically
low levels. The Australian dollar is at the lower end of its range over
recent times.”
While the RBA left rates on hold at 0.75 per cent
on Tuesday, some economists believe the central bank will reduce rates
to 25 basis points, a number flagged by Mr Lowe during a speech last
week.
“Our current thinking is that QE becomes an option to be
considered at a cash rate of 0.25 per cent, but not before that,” the
Reserve Bank governor said. “At a cash rate of 0.25 per cent, the
interest rate paid on surplus balances at the Reserve Bank would already
be at zero given the corridor system we operate. So from that
perspective, we would, at that point, be dealing with zero interest
rates.”
However, Fidelity’s Anthony Doyle believes Mr Lowe’s comments have been widely misread by the market.
“Many
had already been expecting a reduction to 50 basis points in February
and then QE after that. I think he was far more bullish in his speech
and was trying to get the message across that we are a long way from
QE.”
The cash rate has been cut in half over 2019, from 1.50 per
cent to 75 basis points. Mr Doyle believes the RBA will be reluctant to
cut rates any further. He noted that the pickup in house prices in
Sydney and Melbourne could flow through to boost economic growth in the
new year.
An important discussion about the long, medium and short term economic trends, and how this impacts investment strategy, with Nucleus Wealth‘ s Damien Klassen.
Damien runs the investment side of Nucleus, selecting stocks suggested by analysts and implementing the asset allocation.
Note: DFA has no business or financial relationship with Nucleus Wealth.
Caveat Emptor! Note: this is NOT financial or property advice!! Please note the disclaimer in the show.