Riding the investment cycle

It’s a good time to evaluate the bumps in the road

THE start of a new financial year and the turning point of the calendar year … July is a great time to pause, ponder and review your investments.

No matter whether it’s shares, property, interest rates or the economy, everything follows a cycle. Nothing goes up forever and every bust is inevitably followed by recovery.

The key is understanding where you are in the various cycles so you can ride the uptrends and avoid the downturns. July is a good time to make that assessment.

SHARES

The past 12 months has been pretty good for share investors with equities outperforming most other investment sectors including property.

Average stock prices have risen 8.6 per cent over the period but when you add in dividends the total return is over 13 per cent. A double digit investment return in this era of low inflation and interest rates is impressive and most Australians would have been a beneficiary through their superannuation funds.

Although since the start of the calendar year the market has returned just 2 per cent, so most of the gains were in the previous six months.

What has been fascinating is that this strong return has not been driven by the big blue-chip end of the market but by middle and small cap stocks.

The share prices of the top 100 biggest companies rose only 7.2 per cent and the top 50 by just 6.7 per cent. For example, average share prices of the big telecommunications companies dropped almost 35 per cent, bank shares were down 6.7 per cent and Utilities down 5.7 per cent. By contrast, the Small Ordinaries Index rose almost 21 per cent and the MidCap 50 Index was up 10.6 per cent.

So, the market has been good, but the winners have been harder to find and momentum slower in the past six months.

While Australia’s 8.6 per cent return is well behind the 13.7 per cent on Wall St, the performance and momentum of the American market is still a significant driver of ours. Basically, the health of our economy, China, commodity prices and the US sharemarket are the leading indicators you need to follow when assessing whether share prices will continue to trend upwards.

At this stage our economy and China appear solid; good gains in oil, coal, nickel and wool have more than offset falls in beef and sugar prices (iron ore is stable); US shares are volatile because of the Trade war (and based on Donald Trump’s twitter comments) but US company profits are still strong.

PROPERTY

The long-awaited rebalancing of the Australian residential housing market is well underway, which is seeing the decade-long boom in Sydney, Melbourne and Brisbane deflate and even fall. But let’s keep it in perspective; • OVER the past five years national property prices are up 32.5 per cent. • HOUSE prices peaked in September last year and are down 1.3 per cent since then. • HOUSE prices fell 0.2 per cent in June … the ninth consecutive month-on-month decline.

So the big picture is that residential property owners are still well ahead over five years but the cycle has turned down in some of our biggest markets.

For example, Sydney values are down 4.5 per cent over the year, Perth by 2.1 per cent and Darwin by 7.7 per cent. Melbourne, Brisbane and Adelaide only rose by about 1 per cent while Hobart has been the standout with a 12.7 per cent rise.

Regional areas did better, as a whole, than capital cities with a 2.2 per cent rise in property values.

After such a big boom, a correction was inevitable and now it’s happening.

As always it boils down to demand and supply. The boom in prices sparked a record building boom (220,000 homes in the last year) to meet the demand from new migrants and overseas investors.

To cool the boom the Federal Government put restrictions on overseas investors, migration has slowed, banks tightened their lending criteria and lifted investment loan interest rates. They’ve succeeded in what they set out to achieve. We’ve seen this correction coming for a long time. Auction clearance rates have fallen and homes for sale are staying on the market longer. All downturn indicators … depending on the region. Now the debate is around how severe the downturn will be. The building boom has a fair bit more in the pipeline to come through although it looks like official interest rates won’t move up anytime soon.

So the consensus seems to be Sydney will likely be the worst affected city for falls, followed by Brisbane, with Melbourne holding up a little better.

In this cycle, many expect Sydney and Brisbane to be down as much as 10-15 per cent from their peaks.

If you’re a seller, be realistic in your pricing and never buy before you sell. If you’re a buyer, you have the power so drive a hard bargain.

THE ECONOMY AND INTEREST RATES

The Australian economy has been in a growth cycle for a world record breaking 27 consecutive years. It’s an incredible result driven by a series of important influences. During the GFC it was China buying our products (still is today), then it was the mining investment boom, the housing construction boom and now the infrastructure boom which will last another three to five years. We’re forecast to be back in budget surplus next year and net government debt will peak at 18.6 per cent of GDP this year. Jobs growth is continuing and the Reserve Bank is giving no indication of raising official interest in the next six months at least.