Investment Insights

Welcome to our Investment Insights January 2019 update

2019-01-17

In this issue we cover:

 

 1901 Investment Insights economy

Economy

Australia

As we enter a new year with reports of doom and gloom enveloping the property market, stock markets falling and the prospect of interest rate rises in the near term, it is easy to focus on what’s wrong in our economy. However, we should not lose sight of how far we have come and how resilient we can be. A recent piece in the global Economist magazine highlighted some of these achievements, noting that they have in no small part lead to Australia being perhaps the most successful rich economy in the world.

Some of the key points making the argument for our success include:

  • our economy has grown for 27 years without a recession—a record for a developed country

  • our cumulative growth over that period is almost three times that of Germany (often cited as the engine room of Europe)

  • median income has risen four times faster than in America

  • public debt, at 41% of GDP, is less than half of our forefathers in Britain.

Whilst some of our success can be attributed to luck (our natural resources) and our location (proximity to China and Asia), historical reforms to heath care and superannuation in the late 80’s and early 90’s and our large migrant population continue to underpin our economy.

We spend just half the OECD average on pensions as a share of GDP, and with half of our population either immigrants or children of immigrants these policies have set the baseline for the economy we have today. Whilst many of us have become frustrated with the inability of Canberra to “get anything done” and the revolving door of Prime Ministers, the Economist argues that not only can the rest of the world learn a lot from Australia—we could also do with a refresher course on what got us to where we are today.

What the world can learn from Australia: read more here

Global

If we also step back from the swirling headlines of global doom and gloom to look at the facts, you may be surprised to learn that in the United States, whilst markets can be a leading indicator for the economy, the current data certainly doesn’t point to any alarming change in the state of affairs. Consider some of these key indicators of the U.S economy:

  • economic growth is strong, with U.S. real GDP growth forecast to be  2.7% for 2019, down just slightly from the forecast of 2.9% for 2018

  • unemployment is at 3.7%, the lowest rate in 50 years

  • inflation is moderate and forecast at 2.3%

  • consumer sentiment (a leading indicator) is strong. The final December University of Michigan Consumer Sentiment Survey came in at 98.3%, remaining near the highest levels we have seen over the past 18 years (despite the recent weakness in stocks)

  • the November ISM (Institute of Supply Management) Non-Manufacturing Purchasing Managers’ Index came in at 60.7%, 0.4 percentage point higher than the October reading of 60.3% — representing continued growth in the non-manufacturing sector and at a slightly faster rate, and the six-month moving average of the index is at about its highest level in more than 20 years.

This article, from which the above data comes, notes that “nothing in the economic data indicates we are headed into a recession that could lead to a bear market (with the stock market being a leading indicator). While the current economic expansion is now 10 years old, expansions don’t die of old age, as many seem to believe” with direct reference back to the Australian economy’s 27 year unbroken run of growth as articulated by the Economist piece. 

All good things do come to an end however, so Australia and the global economy will experience slowdowns and recessions, but nothing in the current information indicates this is more or less likely in the near future. We continue to watch the slowing economy in China, along with issues around its banking sector, but when Chinese GDP is forecast to “slow” after dipping below 6.5% p.a., let’s keep it in perspective - these are numbers that remain the envy of the rest of the world.

New Year forecasts

In the lead up to a new calendar year, and financial years as well, hours of airtime and pages of columns are filled with predictions and forecasts for the next 12 months. Whilst we always like to caution clients with the ubiquitous “past performance is no indication of future returns” disclaimer, in the case of forecasting, past performance IS a great indicator of future returns.

In this article, Barry Ritholtz outlines why most predications will be either wrong, random or worse - and more to the point given the track records of said prognosticators, why do they continue to bother?

For those who would like to take a more cynical approach (warning this link contains some “fruity” language courtesy of Southpark) over at the Epsilon Theory Blog they contend that not only are these predictions not useful but that nobody actually uses them and most of the time they are just the result of a cycle of sales. Read more here

2018 predictions

So how did some of the crystal gazing for 2018 turn out? Well there was no lack of predictions and many of them were vague and non-specific, however we did find some brave souls who put down real numbers in Fortune magazine. In hindsight, perhaps they would like their time again with some of the projections looking a little “off” right now. Here are some of the highlights:

  • Kane Brenan of Goldman Sachs Asset Management in a video published by the company said “We think equities will continue to outperform in 2018” – the S&P500 was down 6.6% for the year

  • 14 Wall Street banks expected the index to rise another 5% to 2,818 in the coming year courtesy of tax cuts and continued strength in the global economy – the S&P500 was down 6.6% for the year

  • J.P. Morgan Asset Management’s David Kelly warned that investors should expect greater volatility next year and slower growth in the later part of 2018 as the Federal Reserve raises interest rates. Higher interest rates makes it more expensive to borrow. – this is fairly accurate

  • 85% of Wall Street Banks expected the S&P 500 to end higher in 2018 – check out the table for each prediction but the median of these was a closing value of 2,825 compared to the actual close of 2,506.

There was one pessimist out there though, Leuthold Group Chief Investment Strategist Jim Paulsen told the Wall Street Journal (paywall) that he expected a market correction of 10% to 15%, a result of already high valuations.

Finally, the link below is to a video posted by David Booth, Chairman and Founder of Dimensional Fund Advisers which today manages $850b across 9 countries, making them one of the largest fund managers in the world. Many of you will be familiar with Dimensional and their philosophy through the portfolios that we manage for you, but it is always good to hear the message from the horse’s mouth. Booth re-enforces the point that with almost 90 years of data in all types of markets, stocks generally return around 9% to 10% p.a. and that whilst there are no guarantees, having a sensible long term strategy for the good times and the bad is the best approach to long term financial success. Click here to watch the video.

Rather than pouring over all of the forecasts and predications, we think a better use of your time in the New Year is to focus on friends, family and re-charging your batteries and if you have a financial plan, re-visit it with your adviser in due course or if you don’t have one, speak to one of our advisers to help you develop one.

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1901 Investment Insights planning retirement

Planning and Retirement

One of the key tenants of Financial Planning is to focus on long term investment returns, and yet many people spend a large amount of time obsessing about the short term and almost inevitably making decisions that render them worse off. Joe Wiggins of the Behavioural Investment Blog considers 50 of these reasons and we note that 1, 6, 7, 12, 17, 19, 24, 35, 37, 39 and 46 are especially relevant to your long term planning.

Click here to read the article reasons why we don't invest for the long term.

When you couple a focus on investing for the long term with the four most important finance laws that John Lim wrote for his two children aged 11 and 13, you have the five fundamental principles for building a long term financial strategy for today, tomorrow and many years into the future.

Laying down the law: read more here

1901 diagram planning and retirement

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1901 Investment Insights markets

Markets

Equities

With markets having a bad run into Christmas and volatility ruling the day, it is easy to get lost in the short term worry when you see the value of your investments falling. Whilst it is never good when markets go down, it is during these times that we need to focus on the long term. With that in mind, let’s first consider what has historically happened after large falls in the market with the table below:

S&P500 since 1940
Forward performance
Quarter Ending
Quarterly Performance
One year
Three years
Flve years

Sep 1974

-25.20%

38.13%

72.74%

117.46%

Dec 1987

-22.60%

16.81%

48.82%

108.97%

Dec 2008

-21.90%

26.46%

48.59%

128.19%

Jun 1962

-20.60%

31.16%

69.20%

94.84%

Sep 1946

-18.00%

6.45%

24.47%

115.41%

Jun 1970

-18.00%

41.87%

57.39%

56.30%

Sep 2002

-17.30%

0.26%

26.96%

66.32%

Averages

-20.50%

23.00%

49.70%

98.20%

 

This table comes from a recent article published on the Wealth of Common Sense blog on December 23, so is before the 1,100 point rally on the Dow the following day (and subsequent movements since). The table focuses on U.S. markets post-1940 on the assumption that we are not heading towards a 1930’s-like Depression, but if you are particularly melancholy on markets then you can also look at the numbers going back to 1925 in the article link. If you just want to know the big picture numbers then consider the following:

  • The current downturn is the 14th worst since 1926

  • Of these 14 downturns the average fall was 23% (compared to 17% at the time of writing)

  • The average one year return post these falls was 25%, so all falls were made back in a year

  • Over 3 years the average return post fall was 38%

  • Over 5 years the average return post fall was 91%

So whilst we are always looking for better than average returns and performance, I think we can all agree that we would be more than happy with an “average” return over the next 5 years.

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1901 Investment Insights property

Property

As reports of the demise of the property market continue to flood in (if you really want to read a doomsday scenario read the report prepared by UBS), we recently read an interview with Michele Bullock that provided some well-reasoned insight into what exactly is going on in the market. If you have never heard of Michele you are probably not alone, but we think she is worth listening to given that she is the Head of the Reserve Bank’s Financial Stability group. Among her observations she points out that:

  • how her worries about the property market have undergone a 180-degree turn in a remarkably short time

  • even though Sydney house prices are going through a correction now, they are still around 40 per cent higher than they were in 2012-13

  • the current correction in the housing market is playing out against a much more benign economic backdrop than previous corrections; and

  • she is sanguine that the most gloomy predictions won't eventuate.

Importantly, she makes observations around some of the more bearish concerns, including that:

“Prices in Sydney have come down by around 9 per cent – nationwide, a bit less than that. But if you look back over the past few years, people who purchased in that period have typically faced stricter lending standards – they've had lower loan to valuation ratios, for instance", she says. “So this isn't necessarily going to cause huge problems for a lot of borrowers in the last few years who might have got into the market when prices were peaking."

She also points out that if prices do fall by 20% “the limiting of loan to valuation ratios  and the amortisation of some past debt (which the RBA forced the banks into some two years ago) suggests that with LVRs less than 80 per cent, you can withstand a 20 per cent fall before you go into negative equity."

Click here to read the country's housing woes article.

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1901 Investment Insights general interest

General Interest

The articles below caught our attention in the last 3 months, and we thought you might enjoy.  

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1901 Investment Insights our news

ShineWing Australia News

2018 was a busy year for the firm, particularly in the last quarter with our involvement in several international conferences and the successful dual listing of a major client, Yancoal Australia.

A year-long engagement that saw our Australian audit teams working closely with our ShineWing Hong Kong team and a host of over 130 advisors and professionals, came to fruition in December.  We were the lead advisor for Yancoal Australia in its application to list on the Hong Kong Stock Exchange.  This is particularly significant, as it’s the first time an ASX company has successfully dual listed on the main board in HK, and we are incredibly proud of our teams and Partners involved!  Read more here

In October, we joined colleagues from across the globe for the Praxity Alliance international conference in Sydney, gaining an insight to tax and accounting issues and best practice in global jurisdictions.  We also strengthened our trusted relationships and built new ones with overseas peers holding expertise that we can engage when needed for our clients.  Secondments have proved invaluable for knowledge sharing between ours and other Praxity member firms, which we continue to apply for our clients.

At the World Congress of Accountants (WCOA) in Sydney in November, ShineWing International Chairman, Mr Zhang Ke, and Managing Partner, Marco Carlei, were asked to speak at a robust discussion on the business landscape in Asia.  The conference spanned several days and attracted over 6000 delegates from 130 countries.

Attracting a similar number of attendees in Melbourne, the International Mining and Resources Conference (IMARC) included ShineWing Australia Partner Matthew Schofield taking the stage on the opportunities around China’s Belt and Road Initiative.  Our booth included a Lego construction, signifying the integrated team focus that these international projects require, and attracted over one hundred delegates to our booth with enquiries.

That’s it from us – we hope you have recharged and are ready for a great 2019.  We looking forward to touching base soon. 

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Disclaimer:
The information contained on this website and the links are general in nature and do not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek personal professional advice from a financial advisor.
Whilst every effort has been made to ensure the accuracy of the information contained at the date of issue on this website, ShineWing Australia Wealth Pty Ltd is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly through, by use of this website.