Messy muddle-through more likely than GFC repeat
EVERYONE is an investor in at least two fundamental ways: through their superannuation and their residence, whether they own or are renting.
The changes will be volatile and unpredictable; they could be sudden and dramatic. Some are predicting a replay of the global financial crisis.
After the initial shock and losses of the GFC in 2008, over the last five or so years we’ve settled into a very comfortable investment environment.
The very low global interest rates and the money central banks and governments pumped into the global economy has made it great for the owners of assets, and this has flowed positively into your super.
Property in particular has then been “super-charged” by the massive inflow of Chinese money.
Then add sustained strong immigration-driven population growth and this has added demand for property and across the economy.
‘“Buy and hold” has generally worked for property and for shares, especially for the four big bank stocks paying lush fully franked dividends.
If nothing else, the problems the Commonwealth Bank now faces, which has taken its share price down more than 10 per cent, should be a wake-up call.
The key change is the unique era of near-global zero interest rates is over.
There has been a combination of zero rates and major economies doing not too badly, so corporate profits have been good.
The US Fed has started slowly raising its official rate. Slowly?
Even though the UK doesn’t matter much in the world today, the Bank of England is making noises it’s about to follow suit, and even the European Central Bank has at least ruled out further stimulus.
So we are headed for a world of higher rates?
Our own RBA governor has pointed to a stronger local economy and rising rates.
Yes, but they will all follow the Fed in starting to raise rates, albeit at different times and at different paces.
But then events will intrude — the most dramatic would be if we did get a replay of the GFC.
A messy “muddle-through” is more likely.
It’s the positive scenarios which throw up challenges and opportunities.
Broadly, this is rates going up around the world, and the consequential impact on investments and economies.
The best case would be a slow adjustment, with interest rates going up, but to nowhere near previous “normals”.
From an investment perspective, the key to success would be to go back to an old-fashioned future of picking the stocks that would do well (and those not so well). The central banks are going to err on the side of being too slow in raising rates. Then they might have to rush to catch up. That’s the biggest risk. China is going to be a huge player.
Right now, China looks positive across our board
North Korea? It’s the ultimate wild card.
And note: we might have to junk all this in six months.