Share­mar­ket will con­tinue its run

This eco­nomic cy­cle is dif­fer­ent but even­tu­ally a bust will fol­low a boom

Money Magazine Australia - - CONTENTS - Ross Green­wood Ross Green­wood is Chan­nel 9’s fi­nance edi­tor and Ra­dio 2GB’s Money News host.

It al­ways as­ton­ishes me how the tra­di­tional cy­cles of economies and mar­kets con­tinue to re­peat them­selves. It shouldn’t sur­prise me

– it has hap­pened so of­ten – but that’s the na­ture of in­vest­ing: peo­ple are sur­prised by booms and sur­prised by busts.

In each cy­cle there is al­ways a dif­fer­ent theme, po­lit­i­cal nar­ra­tive or dis­rup­tive tech­nol­ogy to con­tend with. And at some stage – gen­er­ally close to the top of the boom – some­one will al­ways say, “But this time it’s dif­fer­ent.” But, gen­er­ally, the same forces of sup­ply and de­mand, greed and fear al­ways make things the same.

For Australia, a conversation about eco­nomic cy­cles must be mea­sured against its per­for­mance of 28 years of pos­i­tive eco­nomic growth with no re­ces­sion. In­ter­est rates also are at his­toric lows and are likely to re­main there for the next 12 to 18 months, if cur­rent wages growth and em­ploy­ment data are to be be­lieved. Both th­ese things are aber­ra­tions in the tra­di­tional the­ory of eco­nomic cy­cles, yet the pat­terns of boom and bust seem con­stant.

Take house prices and the stock­mar­ket right now. Mel­bourne and Syd­ney prices are fall­ing and are ex­pected to keep fall­ing for the next 12 to 18 months. So where does an in­vestor now put their money? Some of it is mak­ing its way into the stock­mar­ket which, as I write, is at an 11-year high.

The gen­eral rule of the cy­cle is that at the top of the eco­nomic cy­cle in­ter­est rates are raised to curb eco­nomic de­mand, which cools down the stock­mar­ket – ini­tially. Money moves out of shares into prop­erty mar­kets but even­tu­ally the higher in­ter­est rates should have an im­pact on shares as well, which is the fore­teller of an eco­nomic slow­down.

This cy­cle is dif­fer­ent be­cause in­ter­est rates have al­ready been at his­toric lows from the last down­turn, dur­ing the GFC. Other fac­tors have also curbed the sup­ply of money, in­clud­ing reg­u­la­tory mea­sures by gov­ern­ment to limit in­vest­ment lend­ing and to in­crease the re­serves that banks must keep.

But the cy­cle is still work­ing in the way it would have if in­ter­est rates had been raised to cool prop­erty mar­ket spec­u­la­tion. It also means money is be­ing di­verted to where – for now – there are bet­ter re­turns, namely the stock­mar­ket. This makes some sense be­cause many Aus­tralian com­pa­nies are per­form­ing bet­ter than fore­cast, which is push­ing their share prices even higher.

And this is where the cy­cle is not quite the same as nor­mal. The money mov­ing into shares seek­ing higher re­turns might nor­mally move to cash as rates go higher. For the moment, with neg­li­gi­ble wages growth and house­holds with mas­sive debt com­pared with their in­come, it is hard for the Re­serve Bank to move rates any­where.

And, as I have ex­plained be­fore, this makes it dif­fi­cult when a global eco­nomic down­turn even­tu­ally comes be­cause, in the nor­mal cy­cle, you would ex­pect the Re­serve Bank to cut in­ter­est rates. If it does not have a rea­son to raise rates now, it has less am­mu­ni­tion to sup­port the econ­omy in the event of a down­turn. And bear in mind the Re­serve Bank has re­peat­edly said it will not start to raise in­ter­est rates un­til it sees an im­prove­ment in wages growth.

This could mean the stock­mar­ket’s run is longer than nor­mal, as com­pa­nies en­joy low in­ter­est rates, rel­a­tively slow wages growth and gen­er­ally buoy­ant con­di­tions. The only warn­ing for th­ese con­di­tions might be a down­turn in home con­struc­tion, which in turn could im­pact re­tail sales (es­pe­cially in home fur­nish­ings and elec­tron­ics).

To com­bat the squeeze on house­hold in­comes, it is also clear that many fam­i­lies are chang­ing their work­ing ar­range­ments. More women are en­ter­ing the work­force and more se­niors are stay­ing in the work­place longer with the di­rect con­se­quence that they are seek­ing to take the cost of liv­ing pres­sure off them­selves. In other words, they are work­ing longer and harder to al­le­vi­ate the ex­tra costs of elec­tric­ity and health insurance and the con­fronting is­sue that they have in­suf­fi­cient money to gen­uinely re­tire.

Many of th­ese trends are new but they should not dis­tract from the ob­vi­ous point. The eco­nomic cy­cle might be dif­fer­ent but it rarely changes. And at this point of the cy­cle, ju­di­cious sell­ing of stocks is a smart strat­egy to off­set any fu­ture down­turn.

The real prob­lem, as al­ways, is the tim­ing of all this.

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