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'Your trusted source for wealth management tips and information.'
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ContinuumFP eNewsletter February, 2016
- a 4-minute read before links
Greetings on this persistently warm, late summer's day: and it's nice to see the sharemarket has warmed up a little as well in recent days.
Because of the unusual start to the year (in terms of market performance); and also recognising that the few clients who have communicated with us about that situation may reflect a broader concern, we are devoting this eNews to bringing some information to investor clients about how this recent volatility fits into 'the bigger picture'. (1)
Using some charts from our friends at JPMorgan Asset Management Insights service, we comment on aspects of the Australian economy, household debt servicing; and show that the recent market performance is compatible with longer-term trends and expectations.
It is interesting to note that when times of high volatility occur, particularly in sharemarkets, doomsayers tend to get a lot of 'air time' (or 'column inches') to add to the confusion and concern of everyday investors, who see their nest-egg - particularly superannuation - losing ground. (2)
It is a common trait in all of us, that we are wary when confronted with uncertainty: this is true, both in our personal and our financial lives. The same applies to business managers in their risk management and decision-making process: they don't react well to uncertainty of legislation, lending conditions, resource supplies, labour availability etc.
Understanding that this is a normal human trait, we shouldn't be surprised when the sharemarket performance is volatile, we find there is uncertainty about some 'usual suspects' - geopolitical disturbances, acts of terrorism, weather extremes (including unseasonal adverse weather), credit constraint, industrial dispute; and illogical, unconstrained robotic speculative trading.
A fairly normal reaction to when uncertainty prevails, is to act defensively: to withdraw a little while we evaluate what is happening. We also tend to fall into a trap of seeking to confirm our doubts by looking for reinforcement of the views that the 'doomsdayers' have persuaded us to consider. (This scenario also works in reverse: when the markets are strongly positive, we can seek reinforcement for our decision to further invest.) (3)
Unless we take a balanced approach and consider not only what we are being told, but also what we can learn from personal and shared experience (shared by others who have previously 'been down this path'), we can find ourselves starting to doubt our own investment strategy (formulated you will recall, after detailed analysis of our circumstances and investment risk aversion profile) and initiate actions that we may soon come to regret. (4)
The issues that we deal with in this issue are whether:-
- household debt in Australia is unsustainably high (and likely to lead to a catastrophic event for the Australian economy)? - and,
- the recent market volatility so unusual as to warrant a change of strategy?
Household debt and the Australian economy
Following are four charts provided by JP Morgan Asset Management from their Insights service: they deal with
- current trends in unemployment and wages: Chart 7,
- household debt in Australia: Chart 8,
- interest rates in Australia: Chart 52; and
- central banks interest rate trends: Chart 50.
[Note: to read the charts more clearly, click on them for an enlarged view that will open in a new Tab.]
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Whilst each individual situation is different, the overall position for Australia is that households are currently deeper in debt than they have ever been, the level of debt is continuing to grow (both evident from Chart 8, top right), the proportion of disposable income brought into the household that is used to service debt is diminishing (Chart 8, bottom right), the proportion of the working-age population in work is growing (Chart 7, left and top right) - and the overall gearing by Australian households is around 20% (Chart 8, left).
Over the past several decades, we have seen that a strong house-builder sector generally reflects in a strong employment situation and a strong consumer economy. Whilst the experience is not universal across Australia, low unemployment (Chart 7, left), increased work participation (Chart 7, top right), lower interest rates (Chart 52) and manageable debt to asset positions (Chart 8, left) are arguably, as good as we have seen them for a number of decades.
...and the lack of pressure on interest rates globally (Chart 50), suggests that interest rates in Australia will remain lower for longer. We are of the view that there is little, if any economic threat to growth in Australia's GDP as a consequence of current and foreseeable levels of household debt.
Is the recent market volatility particularly unusual?
You may have seen at least some of the information in the following charts, in various forms over the time you have dealt with us: from them we learn that in spite of even extreme volatility and/ or trends, the sharemarket ultimately returns to a growth pattern.
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In this Chart (#29) we see that the Australian sharemarket has, over the past 15 years, undergone a number of rises and falls, but has ultimately resumed its upward trend. The recent volatility is only notable for having been compressed into a six-week period: the levels of volatility haven't been notable by comparison with previous events.
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In Chart 46 we see that over the 22 years represented, there have only been 6 in which the sharemarket fell on a year-on-year comparison: this in spite of the fact that at some point in EVERY year, the market was in negative territory compared to the prior year closing value. Taking 2012 as an example, that year finished up 15% for the year in spite of having been down 10% at one stage!
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This chart (#36) shows the history of Bear markets and the subsequent Bull runs, referencing the major events that were the cause of/ accompanied, the market 'collapse' for the event. Depending on your view of the world, one can take comfort from the observations that: a) Bull runs tend to be of longer duration than Bear markets; and b) Bear markets always come to and end and are followed by a Bull run.
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During the drafting of this eNews we came across a quote that we thought was worth repeating - "investing is hours of boredom punctuated by moments of terror" - and we trust that for most of us, boredom resumes soon.
We trust that the information provided herein is of help to you: we encourage you to contact your adviser to answer any questions you have in relation to the charts presented, the comments we have made - or any concerns you have generally in relation to your investments (whether in your superannuation account(s), or outside the superannuation environment. (5) You can contact us by email, phone or our website contact page: we assure you of our prompt and courteous attention.
[As you have read through the above, you will have noticed the number markers - and perhaps wondered what they are about. They lead to links shown below, to articles in our website Library that relate to (and perhaps expand on) the comments adjacent to which they appear.]
The ContinuumFP Team - 'we listen, we understand and we have solutions...'
Please spread the word: feel free to share this eNews with family or friends (and they are welcome to sign up for their monthly copy directly). Any of the information on our website is available for you to use - and again, feel free to share these by email or social media with your contacts: the buttons at the head of this eNews are for sharing this copy; those at the end, link you to our social media presence.
(1) Market Outlook 2016
(2) Investor Risk Profile
(3) Gain when Investor Sentiment driven by strategy
(4) Strategy is king
(5) Accumulating wealth
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Continuum Financial Planners Pty Ltd is a Corporate Authorised Representative of Securitor Financial Group Limited ABN 48 009 189 495 | AFSL 240687 Level 8, 260 Queen Street, Brisbane QLD 4000
