Hans Kunnen

There’s no silver bullet to galvanise the sluggish sharemarket

My blood type is B positive. It’s also my approach to life and investing. But here’s the catch. Being positive is not enough.

As we move towards the tail end of 2017, the standard drivers of economic and sharemarket growth remain in place. The population is growing, firms are reinvesting good proportions of their profits, new products are being developed, interest rates remain low and global growth is picking up. There’s plenty to be positive about.

So why is the Australian sharemarket stuck in the mud? And what will pull it out? More on this later.

What’s not so positive? The Commonwealth Bank shooting itself in the foot does not help. Low wage growth and sluggish retail sales do not help and loss-making offshore ventures also hold some companies back. Commodity prices can also be a bit of a lottery with doubts over economic growth in China.

Strong economic growth in Australia tends to see most companies do well. However, sluggish growth requires more effort from company management and share investors. Do the companies you invest in have a vision, a plan to generate product for clients and returns for shareholders? What is their outlook?

With reporting season now behind us and dividends set to flow, there’s plenty of information “out there” to ponder. If you’re happy with set-and-forget then there’s little to do, but if you want to polish up your portfolio and ditch the dross now is a good time to act.

Regardless of investing style, we all face the impact of major global economic events and geopolitical hiccups. The month ahead holds plenty of both.

Will the sabre rattling surrounding North Korea calm down or flare up? What will US budget and tax negotiations look like now that its debt ceiling has been temporarily lifted? Will the US face another government shutdown in January? And who will be the Fed chairperson next year? Resolution of any of these issues would support global sharemarkets and lift sentiment towards the Australian market. And vice versa!

The US Federal Reserve meets in late October. There is likely to be rate speculation and debate over unwinding the Fed’s asset holdings. My guess is there will be no rate hike in late October/early November and more “market calming” detail on its asset sales program. But what pulls us out of the mud and when will it begin? Hard as I try, it’s difficult to be overly positive in the short term. But let’s give it a go.

Low interest rates are likely to persist in Australia. Inflation remains low and the Reserve Bank is under no pressure to lift its cash rate. Given our high level of debt, it would require only a small hike in rates to slow economic activity. Low interest rates will support the sharemarket and keep business borrowing costs under control.

During 2017, we’ve seen an upturn in business investment intentions. Growth in business investment is generally a forerunner to increased sales and increased earnings. Given that we’re coming off a massive resources investment boom, an upturn in non-mining investment is very encouraging. On top of this, Australia is also undergoing a surge in infrastructure spending.

But hold on. That song sounds familiar! The RBA and economists have been saying this for years! True. We are all playing a “long game”. Keep in mind that the US and European economies fell harder during the GFC. Their rates were pushed down close to zero and less. The US economy has been gaining momentum for several years, and then voters elected a government that promised very stimulatory policies. There is no silver bullet for the Australian market. I’m not holding my breath for a surge in the All Ordinaries above 6000. It will come but, in the meantime, polish your portfolio, reflect on global events and encourage your local member of parliament to work on policies that will create jobs.