It has been fascinating to observe the volatility in equity markets through the later part of 2018 and into the beginning of this year. At the close of 2018 calendar year, the S&P500 Index in the United States delivered the worst December since 1931 and the worst month since February 2009.
For those who can’t immediately recall what was happening in 2008 and into 2009, a simple and fun way to remind yourself is to check out the movie The Big Short (or reading the book by Michael Lewis, upon which the movie is based). Simply put, 2008/2009 was when we saw the largest collective failure of major financial enterprises in history. There was a lot happening then and there is now!
Importantly, the manner in which information is presented plays a huge part in influencing how people feel and their decisions. By way of example, the S&P500 index posted a return of -4.38% for the 2018 calendar year. For the 2008 calendar year, the return from the S&P500 index was -37.00%. Quite a difference to the first paragraph, even though those statements about relative returns are quite true! What this is intended to highlight is that our perspective can change depending on what we are comparing an investment outcome against.
As the 2019 year begins, there are many reasons to be pessimistic in the near term, such as:
- The trade war between the US and China continues after nine months and now we’re seeing a US Government shutdown taking place over President Trump’s desire to build the US/Mexico border wall.
- European economies are slowing, ‘Brexit’ continues to create uncertainty, Italian government debt and spending levels continue to be unsustainable, and far-right populist parties across Europe, such as the Alternative fur Deutschland (AfD), continue their rise.
- China’s economy is slowing, which will have major ramifications for Australia.
- Over the past decade since the Global Financial Crisis in 2008/09, Australian household debt to income has doubled whilst household savings to income have fallen to their lowest levels. Wage growth in Australia also remains very low. If (or as) interest rates rise, the borrowing costs of Australians will increase rapidly. That might be ok if there were savings or increasing wages to support the increasing costs, but it just isn’t the case.
- Given property prices in Sydney and Melbourne have fallen as have WA prices over the past few years, the ‘equity’ people have been relying on is likely to be gone.
- The Royal Commission into Banking and Financial Services has led regulators to tighten assessments for obtaining credit.
- We are almost certain to have a change of government in Australia, with the incoming proposing to remove negative gearing, refundable imputation credits and further restrict discretionary contributions to superannuation, much of which is invested in Australian shares. What is the potential for negative impact on house prices and Australian share prices?
Even those with a terrible imagination can put together a few very good disaster scenarios with the above information. However, there are always variables and evidence shows it is extremely difficult for very smart and highly trained people to consistently, correctly forecast what will happen with capital markets.
Nobody has a crystal ball. Therefore, anyone claiming there is going to be a continued and more significant fall in equity markets, or a strong rebound for that matter, is only really guessing. Sure, it may be a highly educated, experienced and well informed guess, but the point remains – nobody knows.
Equally, when it comes to property prices, there will always be various interested parties spruiking that prices are going to fall, or that we’re at the bottom and the only way is up. To us, the equation of low savings plus peaking debt levels plus little or no additional borrowing capacity plus low interest rates doesn’t paint a rosy picture. However, we do not know what the outcome is going to be – only time will tell.
There is no one ‘right’ answer when it comes to the investment of your capital. Using an evidence based approach to build a portfolio of investments can objectivise a complicated topic. At the same time, we live in a complex world, which to us emphasises the value of having a Financial Adviser who knows you well to help guide your choices throughout the course of your life.