Let the good times roll
Global growth looks positive but there are reasons to remain alert
February! It gives us Valentine’s Day, it sends the kids back to school and it delivers the latest news on company profits. But wait, there’s more. This year, February also brings us a new leader at the US Federal Reserve. These are exciting times for investors! Well, almost.
Whether you’re a set-and-forget investor, a day trader or somewhere in between, the month ahead will provide plenty of food for thought.
Reporting season will tell you if your income from shares is surging, falling or, as is most likely, fairly steady. Even with rising share prices, dividend yields, excluding franking credits, have been in the 4%-5% range for the past 10 years. Given low inflation, this suggests that Australian companies continue to provide a good stream of income.
Barring individual corporate disasters, the profit results in February will provide support for the sharemarket over the months ahead. In addition, support should come from a growing economy, global economic tailwinds and ongoing low interest rates.
But a word of caution. While global economic growth looks positive, a mixture of financial uncertainties suggests we need to keep alert. These uncertainties include record US share prices, the potential for tighter Fed policies and the nose-bleed levels of debt.
For the first time in 30 years, the US Federal Reserve will not be chaired by a PhD-trained economist. That may be cause for cheer or despair. However, the new chairman, Jerome “Jay” Powell, does have a strong pedigree in financial markets, having worked in the US Treasury and as an investment banker and a private equity executive.
Powell’s statements will be scrutinised for hints regarding changes in Fed thinking and policy direction. I expect a steady hand but the mixture of nervous investors and potential slips of the tongue by the new chairman could create market volatility.
So, as you count your dividends, watch US policy and delete those emails tempting you to buy Bitcoin, what else will February bring? Three things for sure: yet more Bitcoin emails, softer housing prices and a spotlight shining on the bad behaviour of banks.
My DNA is Dutch. We didn’t invent tulips but we may have started the speculative tulip bubble of 1637. Now that’s a mistake that shouldn’t be repeated. As an investor, if you can write a one-page explanation of Bitcoin (or its alternatives) clearly stating its origins, operations, risks, rewards, checks and balances, then by all means have a swing. But buyer beware. I’m going to resist the temptation.
Property has been a good servant for many investors. However, the game is not getting any easier. Banks are nervous, the authorities are nervous and the supply of apartments continues to grow. Rental yields should stay firm on the back of population growth but capital gains in the near term will be harder to find.
The royal commission into misconduct in the banking, superannuation and financial services industry will likely throw up horror stories, as will the AUSTRAC/CBA court case. Despite this, chunky yields, reasonable credit expansion and growth in superannuation are attracting investors to banking stocks. This may change if offshore markets become edgy about potential penalties.
Being early in the new year, the usual banner adverts predicting “recession 2018” are appearing on the internet. These follow similar ads predicting recessions for 2014, 2015, 2016 and 2017. One day they will be correct but probably not this year. There is never room for complacency in investing but persistent fear-mongering can suck the joy out of life and out of investing. Economic and market cycles are a part of life. As investors, patience, good research and a balanced portfolio should continue to see us through good times and bad. At present, times are pretty good. Let’s enjoy them.