Uncertainties abound, but get ready for a lifestyle spending splurge

It’s pretty much an accident, but a year after I was writing about the new world dominated by Covid, things have eventually panned out to be okay, with money at least. A year ago, the sharemarket was climbing back from its March 2020 All Ordinaries Index low of a bit under 5000. Governments globally were pumping out money and to little surprise the market had ridden up to 6000. Now it’s getting close to 8000 and investors in shares have enjoyed governments shovelling money to people and businesses while interest rates are at record lows.

Cheap money – and lots of it – looked like a nice time for markets and, sure enough, it has been 12 months of very handsome returns for shareholders and some nice dividend payments.

Obviously, it has been a shocker for those relying on interest from term deposits and bank accounts. The good thing about these investments in our banking systems is that they are safe and secure. I’ve always advocated having safe money at the bank to cover our spending in market downturns and other nasty periods of history. For a younger person, in a secure job, this might be a small amount. For part-timers like me, in my mid-60s, I like the idea of having a couple of years of spending money at the bank. I don’t want to sell assets at discount prices in a market bust to cover lifestyle costs. As I move to full retirement, if ever, I’d hold closer to three years of lifestyle spending.

Where I have been surprised is the boom in most property markets. Cheap money is clearly great for property. I shook my head when I saw a 1.5% mortgage advertisement this week. But last year I worried that job losses and small business failure could balance things out, so my view was to absolutely buy for the long term.

Population growth will do a lot to move prices upwards, but my view was a stable market. Wrong. It has been quite extraordinary. The more predictable part was growth in regional values. This, I think, will continue as people work from home. Personally, I think we will be back working in our big cities, but most likely not five days a week. So, the regions with lower costs and great lifestyle look very attractive.

So, significant government support for jobs and the economy, plus very low interest rates, spell bad times for term deposits and bank accounts but good times for shares and property. At some stage, as always, things will get ugly for property, not as a long-term asset, but in the short to medium term, whenever interest rates rise. The sharemarket will not like this either.

The Reserve Bank is saying that rates will be low for three years, so if the plan that our economy reopens as vaccination rates move past 70% holds, I see another good year for assets such as property and shares.

One important fact is that many of us are spending a lot less. I suspect the travel, entertainment and eating out part of your budget is flush. We have found that not only has our lifestyle spending dropped to about zero, but a bunch of hotels and airlines have sent us a refund, or at least a credit.

So, in the hundreds of billions of “new” money in our banks sits a decent pile of unspent money waiting to be unleashed. Like you, we are keen to rebook those holidays and revisit our favourite local restaurants. When we have cash, we humans tend to spend it, so providing Covid does not have other plans with some horrible new variant, like most commentators I expect a bit of a lifestyle spending boom next year

With strong statements about cheap money from Reserve Banks, both here and globally, and economies reopening as we learn to live with Covid, it is not unrealistic to look forward to a good year for asset prices.

The great uncertain, though, is uncertainty. Who knows whether Covid will evolve. A strong mitigating factor, though, is that the world’s scientists are already preparing for this potential battle. Of course, we also have global tensions and economic shocks. China’s property company Evergrande is a reminder of this. Some sort of global shock will surprise us next year and that is the unknown factor.