Investment Views Update Q2 2019

By Matthew Vickers | Investment, economic |

Investment adviser Matt Vickers, details the current economic outlook across fixed interest and both the domestic and international markets. If you'd like to be kept up to date with our quarterly economic insights, follow us on LinkedIn.

Domestic economy

Stockland CEO Mark Steiner stated the following;

 “Credit is the lifeblood of the Australian economy, and policymakers and financial institutions must ensure responsible access to credit for first home buyers, owner occupiers and investors – who contribute to the supply of rental properties – to help ensure the resilience of our housing market."

The domestic economy remains overly dependent on credit. Australia has the 4th highest private debt to income ratio in the world (at around 200%) and the highest in the world on debt servicing as a percentage of income (around 20%). Morgan Stanley is predicting lower property prices and heightened economic risks. Consumers have to date supported consumption by reducing their savings rate down from 5.8% in 2016 to 2.5% of income in 2019. There is virtually no capacity to support consumption growth through further reductions in savings.

Investors with heavy exposures to bank shares and property assets have essentially layered their risk exposure to the residential property market and would be well advised to diversify their wealth.

The Australian economy shrank on a GDP per capita basis in the second half of 2018. It may be bad news to the Sustainable Australia Party (with their anti-immigration agenda), but immigration is keeping Australia out of economic trouble.

The recent budget further cut investment in research and development, hamstringing the possibility that a productivity boost will pick up the slack.

Internationally

With potential consumption weakness arising domestically and commodity prices having already surprised on the upside, further weakness in the AUD is possible. Speculating on currency movements is a quick way to get egg on your face, but still preferable to Senator Anning’s approach.

International exposure provides downside protection during weaker economic conditions. As global weakness typically leads to lower commodity prices, the AUD (which is heavily exposed to commodity prices) tends to reduce in value. This reduction in the value of the AUD during economic weakness, provides a tail-wind in the AUD value of international holdings.

Our preferred manner of accessing international markets is via active positions. Central banks continue to attempt to normalise their record low interest rates. Tightening monetary policy (interest rates going up) will negatively impact equity market sentiment, so passive exposures offer no downside protection against sentiment movements.

The best source of long-term capital protection remains investing in reasonably priced and well-run businesses.

Fixed interest

Early this year the Federal Reserve softened their stance on raising interest rates. This essentially bought forward a years’ worth of fixed interest returns. Expect a benign outlook as the lower yield expectations have already been priced in by the market. Risks are now more likely on the downside should economic data surprise on the upside.

As we have stated for the last few years, floating rate positions, whether in bonds or corporate debt markets (where there is a liquid secondary market) are the best places to be in a low interest rate world. Cash is a reasonable place to hold capital for the short/medium term, whilst awaiting further opportunities.



At Peter Vickers Business Group, we are dedicated to assisting you through all stages of your wealth creation, from planning to implementation, and combined with regular monitoring and review. To speak to one of our experts and discuss your financial goals please contact us at services@pva.com.au or (02) 9496 2300.


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