Oliver's Insights – Share market falls - seven things for investors to keep in mind

The attached note takes a look at the recent sharp falls in share markets and looks at seven things for investors to keep in mind. The key points are as follows:

• Share markets have fallen in recent weeks on the back of worries about inflation, monetary tightening, the Omicron disruption and the rising risk of a Russian invasion of Ukraine.

• Its too early to say markets have bottomed.

• Key things for investors to bear in mind are that: corrections are healthy and normal; in the absence of a renewed recession share market falls may be limited; selling shares after a fall locks in a loss; share pullbacks provide opportunities for investors to buy them more cheaply; shares continue to offer an attractive income flow; shares often bottom at the point of maximum bearishness; and finally, to avoid getting thrown off a long-term investment strategy it's best to turn down the noise.

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2022 – a list of lists regarding the macro investment outlook

The attached note takes a look at the continuing surge in global inflation pressures, notably in the US. The key points are as follows:

• Inflation is placing increasing pressure on major central banks to remove monetary stimulus.

• Inflation & rising interest rates will likely contribute to more volatile & constrained investment returns this year..

• The long-term downtrend in inflation and interest rates since the early 1980s is likely to be over removing a tailwind for investment returns.

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2022 - a list of lists regarding the macro investment outlook

The attached note provides a simple point form summary of key insights and views on the economic and investment outlook. The key points are as follows:

• 2021 saw strong investment returns with low volatility.

• 2022 is likely to see more constrained returns with increased volatility.

• Watch: coronavirus and vaccines; inflation; the US mid-term elections; China issues; Russian tensions with Ukraine and the west; & the Australian election.
  

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Five reasons to expect a cooling in the Australian property market and falling prices in 2023

Key Points:

• After a 22% rise in Australian home prices this year, they are expected to slow to 5% growth in 2022 with prices likely to fall 5-10% in 2023.

• The main drivers behind the slowdown are: worsening affordability; rising supply; rising rates; macro prudential tightening; & a rotation in spending away from housing.

• The main risks on the downside are another big covid set back or faster rate hikes & the main risk on the upside would be a fast return to pre-covid immigration.
  

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Central banks – including the RBA and Fed – gradually removing monetary stimulus is more good news than bad

The key points are as follows:

• The march of central banks towards removing monetary stimulus is continuing with the RBA bringing forward its guidance regarding the first rate hike and the Fed set to commence tapering. We expect both to start raising rates later next year.

• The shift towards monetary tightening signals slower more constrained share market returns – but the trend should remain up as the impact of monetary tightening is offset by economic recovery & higher profits, monetary policy is still easy and will be for a while & bull markets usually only end when monetary policy is tight.

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Compound interest is like magic - and it's an investor's best friend

The attached note looks at the recent pull back in investment markets and renewed uncertainty regarding the outlook. The key points are as follows:

• Compound interest is an investor's best friend.

• The higher the return, the greater the investment contribution and the longer the period the more it works.

• To make the most of it, ensure an adequate exposure to growth assets, contribute early and often to your investment portfolio and find a way to avoid being thrown off by the investment cycle.

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Central banks - including the RBA and Fed - gradually removing monetary stimulus is more good news than bad

The attached note looks at the recent pull back in investment markets and renewed uncertainty regarding the outlook. The key points are as follows:

• The march of central banks towards removing monetary stimulus is continuing with the RBA bringing forward its guidance regarding the first rate hike and the Fed set to commence tapering. We expect both to start raising rates later next year.

• The shift towards monetary tightening signals slower more constrained share market returns - but the trend should remain up as the impact of monetary tightening is offset by economic recovery & higher profits, monetary policy is still easy and will be for a while & bull markets usually only end when monetary policy is tight.

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The worry list for shares - how worrying are they?

The attached note looks at the recent pull back in investment markets and renewed uncertainty regarding the outlook. The key points are as follows:

• It's still too early to say that the pull back in share markets is over. Some of the worries around US fiscal policy and politics, China, global supply constraints and central banks likely have further to run and could see the correction go further.

• Historically the main driver of whether we see a correction or a mild bear market, as opposed to a major bear market, is whether we see a recession. While it may take time, ultimately, we see the current worries being resolved in a way that does not severely threaten global or Australian growth.

  So, we continue to see the broader trend in global and Australian shares remaining up once the correction runs its course.

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Why is Australian housing so expensive and what can be done to improve housing affordability?

The attached note looks at the recent pull back in investment markets and renewed uncertainty regarding the outlook. The key points are as follows:

• The key drivers of poor housing affordability and high household debt levels in Australia have been low rates and poor housing supply.

• Macro prudential controls to slow home lending now look imminent. But this is just a cyclical measure.

• More fundamental measures to improve housing affordability need to focus on boosting housing supply and decentralising away from major cities.

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Five reasons why the Australian dollar is likely to resume its upswing over the next 12 months

The attached note looks at the outlook for the Australian dollar and what it means for investors. The key points are as follows:

• Since its February high of around $US0.80 the $A the $A has fallen on the back of global growth concerns, a slowdown in China and the Delta outbreak in Australia.

• However, there is good reason to expect the $A to resume its rising trend: sentiment towards the $A is negative; global growth is likely to remain strong; commodities look to have entered a new super cycle; Australia has a large current account surplus; and Australia is likely to see strong growth next year.

• There is a case for Australian based investors to tilt a bit to hedged global investments but while maintaining a still decent exposure to foreign currency given the diversification benefits it provides.

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China's growth slowdown and regulatory crackdown - what does it mean for China's growth outlook?

China is seeing a regulatory crackdown on tech companies, the property sector and inequality aimed at supporting its middle class.

• The shift to “bigger government” in China likely has further to run.

• Chinese economic growth is likely to be soft this half but policy easing and maybe a pause in some regulatory moves should allow a rebound next year.

• This will be positive for commodity prices and Australia.

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Six reasons why share markets are at or near record levels. But is it sustainable?

The attached note looks at relative strength of share markets at a time when bond yields have fallen sharply on the back of concerns about the threat to economic activity from Delta coronavirus outbreaks amongst other things. The key points are as follows:

• Bonds and shares often diverge – we saw this a year ago with shares rallying but bond yields staying low.

• Shares have been boosted by strong earnings news, improved valuations, investor awareness of last years’ experience of a post lockdown bounce back, vaccines providing optimism in a more sustained reopening, some pressure for more stimulus & M&A activity.

• While shares remain vulnerable to a correction, the trend is likely to remain up.

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Great investment quotes for topsy turvy times

The current environment seems to be one of extreme uncertainty. We have seen a strong economic recovery from last year’s global and Australian recessions – but there are worries about the resurgence of coronavirus driven by the Delta variant, peak growth, peak monetary and fiscal stimulus, high inflation, and high debt levels. And ‘get rich quick’ trading around crypto currencies and ‘meme’ stocks like GameStop on the back of the Reddit/WallStreetBets forum phenomenon have seen some question traditional approaches to investing. In the meantime, investors are getting bombarded with more information and views around investing than ever.

Despite this, the basic principles of investing remain timeless. Fortunately, some investment experts have a knack of encapsulating these in a few words that are insightful and inspiring. This note looks at those of particular relevance to the environment investors face today drawing on Sir John Templeton, Jack Bogle, Peter Lynch, Warren Buffett, Aldous Huxley, Frank Zappa, The Beatles and others.

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Coronavirus continues to cause havoc globally and in Australia – but here are five reasons for optimism

The attached note takes a look at the renewed rise in coronavirus cases globally and the outbreak in Australia and the implications for the economic recovery. The key points are as follows:

• The news on coronavirus has been bleak again lately - with rising cases globally and the ongoing NSW lockdown.

• However, there are five reasons for optimism: lockdowns still work against Delta (eg, in SA & Victoria where lockdowns were able to be relatively short because they started early and hard); vaccines are working; once lockdowns end economic activity rebounds quickly; the threat posed by Delta will keep fiscal & monetary policy easier for longer; and vaccinations are ramping up in Australia.

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Seven key charts for investors to watch - where are they now?

This note takes a look at seven charts we highlighted in January for investors to watch as being critical to the investment outlook this year. Put simply, where are they now? The key points are as follows:

• While shares are at risk of a near term correction on the back of coronavirus and inflation concerns, the trend is likely to remain up against the backdrop of continuing economic recovery and low interest rates

• Seven key global charts worth keeping an eye on by investors are: the trend in new coronavirus cases and deaths - particularly in the UK; global business conditions PMIs; unemployment & underemployment; global inflation; bond yields; the gap between earnings yields and bond yields; and the $US.

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Five ways to turn down the noise and stay focussed as an investor

The note looks at the ever increasing level of noise around investing and how investors can manage it. The key points are as follows:

• A surge in financial information and opinion along with our natural inclination to focus on bad news is arguably making us worse investors: more fearful & short term.

• Five ways to help manage the noise and stay focussed as investors are: put the latest worry list in context; recognise that shares return more than cash in the long term because they can lose money in the short term; find a process to help filter noise; make a conscious effort not to check your investments so much; and look for opportunities that investor worries throw up.

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2020-21 saw investment returns rebound - expect more modest but still good returns this financial year

The attached note reviews the investment performance of the last financial year for major asset classes and looks at the outlook for the current financial year. The key points are as follows:

• 2020-21 saw investment returns rebound after the coronavirus hit depressed 2019-20 returns.

• Key lessons for investors from 2020-21 were to: allow that share markets look ahead; timing markets is hard; don't fight central banks; and turn down the noise.

• Over the next 12 months returns from a well-diversified portfolio are likely to be slower but still solid.

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Central banks heading towards the easing exits - five reasons for investors not to be too concerned

The attached note looks at the gradual shift towards the exits from ultra-easy monetary policy by major central banks and the implications for investment markets. The key points are as follows:

• The gradual shift of central banks including the Fed and RBA towards an exit from monetary easing has caused some volatility in investment markets.

• We continue to expect the first RBA rate hike to be in 2023, albeit there is a risk it could come in late 2022.

• However, there are five reasons not to be too concerned: central banks are simply reflecting economic recovery; monetary policy remains easy; shares rose through the last Fed taper; share bull markets usually only end when monetary policy is tight; and it's normal in this phase of the investment cycle for returns to slow.

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Inflation Q&A - should we be worried about higher inflation?

The attached note takes a look at current concerns about rising inflation. The key points are as follows:  

• Inflation will likely rise further in the months ahead due to base effects, bottlenecks & reopening but it’s likely to fall back again from later this year as these drivers fade.

• Shares face short-term correction risks but as inflation settles the broad trend is likely to remain up.

Viewed in a very long-term context, we are likely now going through the bottoming of the 40-year decline in inflation that’s been in place since the early 1980s.

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The Australian economic recovery remained strong in the March quarter with GDP up 1.8% – seven reasons for optimism

The Australian economy continues to recovery strongly.

 This note looks at the outlook. The key points are as follows:

• With growth of 1.8% in the March quarter, Australian GDP is now back above its pre pandemic level.

• While uncertainties remain – including around the latest coronavirus outbreak in Victoria – there are seven reasons for optimism that the recovery will continue at a decent rate:

  • Vaccines

  • Global growth is ramping up

  • Consumer spending is well supported

  • Dwelling investment is likely to remain strong

  • Business investment is strengthening

  • Fiscal stimulus is continuing

  • Monetary policy remains ultra-easy

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