Messy mud­dle-through more likely than GFC re­peat

The Sunday Times - - BUSINESS WEEKLY - Terry McCrann

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.

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