“If you are not confused you don’t really know what’s going on” – Perpetual’s portfolio manager David Hudson summed up his thoughts during his briefing in mid-August before expanding to say that there are still plenty of reasons to stay enthusiastically invested however there are these concerns lurking in the background. And this is the general theme we have pointed to in the past couple of Newsletters.

We were briefed throughout August by a number of portfolio managers including PIMCO, Perpetual, Blackrock, and Schroders and the consensus remains overall positive based on things like solid global economic recovery and strong corporate growth figures especially in the US.  Some analysts are still confident of low double-digit growth while others think high single digit numbers, either way solid.  Global economic growth is sound though forecasts sit within a fairly broad range of between 2% and 4.5%, and inflation is low which is good for risk assets but is on the rise in the US.   While it might make financial markets quiver initially it is a good sign for an economy bubbling along. In Australia it is a little slower.

But equally they remain conscious of some potential problems:

  • Quantitative Tightening: the opposite of “printing money”……. After the well-known and well-publicised period post-GFC where federal reserve banks pumped money into the economy by buying government bonds, that process has been in reverse now for quite some time. The European Central bank will start wrapping up its quantitative easing programme at the end of this year leaving the Bank of Japan as the last major central bank still engaged in asset purchases. But slowly and without fanfare even the BOJ has been reducing its purchases in recent times.  The US stopped ages ago and is about to start selling these assets – the fact that world economies no longer need and can start reversing these support programs is a good thing however financial markets get hooked on these programs and the portfolio managers are conscious that the impacts of such a huge shift in liquidity may be underestimated.
  • Some political and economic wobbles – Italy and Turkey:  probably not major worries in the scheme of things. Italy, as fantastic a country as it is to visit, has been a political basket case for a very long time (see earlier Newsletters) and Turkey’s problems have apparently been coming for quite a while with spiralling debt and political turbulence. The chance of contagion is rated low with the analysts we spoke to pointing to Turkey having a different economic model to most in the region.

Perception of, or reaction to, these risks tends to intensify when financial markets have been on the up for a fairly long time – people tend to look for reasons to exit and that can be a self-fulfilling prophecy.  It is well observed that US markets in particular have been on a very long bull run and some people are predicting that for this reason alone things are due to drive off a cliff.  However one manager noted that “markets don’t die of old age” bringing us back to the simple points that fundamental economics are still very sound around the world.  As to investment decisions, it comes back to the skill of the manager in being able to spot the winners and avoid the train wrecks.

Our local share market has been very good in patches but has not roared back yet – see Chart below.  Either way, a 5% to 8% correction from time to time is a healthy thing and is a wonderful opportunity for long-term investors.

Every manager we met with this month addressed the growing talk of a global recession and each one of them was confident that this would not happen ‘anytime soon’ (ie within the next 18 to 24 months).  We know that this is a position that is assessed and reassessed and impacted by other events along the way regardless.

So, for regular readers, the lesson out of all of this is boringly similar:  we know equity markets are volatile by nature; and we also know we need to hold at least some of our investments in equities if we hope to achieve good long-term returns which will not only build more wealth for retirement, but will preserve money longer once in retirement. The key, as always, is to understand and be comfortable with the make-up of your own investments so you can be in a position to ride out inevitable periods of downturn without losing sleep.

And the best way to do this is to be engaged in your future and keep in regular contact with your Solace Financial adviser.

Chart:  How long our share market has taken to return to its peak after the most significant crashes in our history

Sources:  RBA, Bloomberg, Blackrock, MorningStar Research, Perpetual, PIMCO