An Uncertain World
This article follows on from our last newsletter, “Being an Investor and not a speculator … and knowing the difference”, from December 2015. We highly recommend you read the article before continuing. Click here.
In such an uncertain world, we find very little use in debating about what happened today or yesterday and what could happen tomorrow in the geopolitical scene, the sharemarket, or whether China will grow by 5% or 7% and anything in between. No doubt, we need to have a view and be able to interpret the facts and many angles within the bigger picture. However, to be influenced by daily price movements is often the main cause of underperformance by the common investor. Ben Graham (economist and professional investor) pointed out that “the day-to-day market isn’t a market analyst, but rather, it’s a barometer of investor sentiment. You just can’t take it too seriously.”
However, certainty about anything related to the future (no matter the reasoning or historical facts provided) is unattainable. We read the same newspapers, listen to the same news, experience the same market movements and have the same factors play at our emotions. Some mistakes will be made. Through our experiences, we may have more confidence about our reasoning but more importantly, those that can better stand up to their own emotions and take responsibility over their own actions by not falling into the curse of speculation, are likely to end up with a much better outcome. It is common to question the few items that have not done well because no one likes to makes losses, but if the overall portfolio as a whole goes forward over time, then you have made progress.
What is our view?
We believe that the issues surrounding China have caused some short term angst in a market that hates uncertainty. China’s shift towards a more sustainable and progressive path of a consumption and services economy was never expected to go smoothly all the time. However, progress has been made. These sectors are growing strongly but commentators have continually focused on their cooling fixed asset investments (i.e. infrastructure) and property valuation. It is this cooling off however, that has made us more confident that China should avoid a hard landing. China’s future path has repercussions for Australia, especially in the mining and resources sector. While commodities and their subsequent share prices have dropped significantly and there is now an argument that value is starting to emerge, we are still cautious. Historically, the mining boom and bust can last between 10 to 20 years each way. Now that almost everyone has agreed the boom is over, we believe we are only in the second or third innings of the bust cycle. No doubt, within this period, there could be a bounce large enough to make investors believe the bust is over, however investors’ perception takes time to be fully convinced. As such, we are likely to stay away or at least underweight the sector for several years to come.
On the other hand, the policy tightening in the US has longer term repercussions on asset value. This is one important factor in why we have not hurriedly bought large quantities of shares during the current decline. The trajectory in the normalisation of the US interest rates has caused much debate but no matter the outcome, the future rate is likely to be materially higher than the current rate. While hard to imagine, there is also a better than even probability that the Euro region could also begin to consider tightening after the US has normalised rates if their region continues their slow upward progress, adding more fuel to the fire. It is by no means certain, but we think there is a good chance that the overall equity market could struggle to make a lot of progress during this tightening cycle. This is where a selection of high quality companies that trade at a reasonable valuation are likely to do better than the overall market. It is important that we stick to our knitting and keep patient when finding opportunities.
With all the uncertainty and volatility that has immersed markets since the first day of 2016, we thought we’d leave you with this light-hearted message about the current state of play.
“On Wall Street today, news of lower interest rates sent the stock market up, but then the expectation that these rates would be inflationary sent the market down, until the realisation that lower rates might stimulate the sluggish economy pushed the market up, before it ultimately went down on fears that an over-heated economy would lead to a re-imposition of higher interest rates.” Mankoff, January 2016
Hopefully this brings home the message that it is the big picture that counts in the end, not the daily commentaries that bamboozle you and can sway your emotions from left to right throughout the day. For most people that follow the markets to some degree, investing is simple enough, but it’s never easy.
For more information on how we can help you navigate this uncertain world, please contact your adviser at Financial Decisions on (02) 9997 4647.
Disclaimer: This publication has been compiled by Financial Decisions (AFSL/ACL Number 341678). Past performance is not a reliable indicator of future performance. While every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on reasonable data, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risk and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) Financial Decisions nor its employees are in any way liable to you (including for negligence) in respect of any reliance upon such information or advice. February 2016
Contact: Financial Decisions PO Box 484 Mona Vale NSW 1660, T 02 9997 4647, F 02 9997 7407