With the end of the financial year fast approaching, given the uncertain global circumstances we have seen, investors should be pleased with the very positive year that is near completion. In fact, given the Covid-19 pandemic, which the world went in and out of since February 2020, all Australians should be, and probably are, delighted with where they are, where the economy is, how low unemployment is, and with the overall positive economic outlook ahead.
In a recent article, Deloitte research shows that in real terms when looking at the latest official GDP data here, the GDP per capita confirms that Australians are, on average, better off today than what they were before Covid-19 struck. It added that the data illustrates the Australian economy is continuing to regain its mojo; and that growth drivers are becoming more broad-based and government spending is becoming less of a lifeline.
Yes, there have been recent bouts of domestic border closures and varying shutdowns of a couple of capital cities here because of containment leaks of ‘overseas arrivals’ in quarantine. Amazing how many of these arrivals come here with the virus! However, in the main, with Covid-19 vaccines being rolled out, there should be less and less closures ahead. Yet they still will occur again given the bizarre and questionable stance governments here are taking to still using city hotels for incoming arrivals quarantine rather than purpose-built quarantine stations away from major cities and regional towns. Basic cost versus benefit analysis on both a human level and an economic scale would, I do believe, show the latter would be more sensible and provide a stronger long-term solution to being able to open our borders to the world.
Deloitte research also noted that as we head forward towards 2022 (when it is anticipated that our international border restrictions will begin to ease), it is increasingly clear that the measure of economic success will be vaccinations and the ability for societies to function with open borders, not closed ones.
The boosters behind the strength in the Australian economy, and it is fair to also say in many other global economies too, such as the USA, remain in place. These boosters include quantitative easing measures by central banks, favourable tax incentives, continued government spending into the economies, particularly targeted areas hit harder by the loss of business impact caused by the pandemic. Equally and importantly, both consumer and business confidence are back on the saddle and galloping along, as are the solid results in corporate earnings across many sectors. The challenge will be when and by how much to reduce these boosters and lifelines, and to thereby allow the more ‘normalised’ flow of the economy to resume.
As the fund manager, Investors Mutual, commented in an article last week; “Share markets around the world, including Australia’s, remain well- supported as economic growth continues to rebound from Covid-19 lows and central banks continue to hold interest rates at record low levels, despite increasing signs of rising inflationary expectation. The Australian share market is now trading at record high levels with seemingly very little on the horizon to halt its ongoing rise”.
That seems to be the case indeed, especially with the surprisingly strong corporate earnings announcements and further with the forward earnings guidance for 2022.
As we know though, markets can be volatile at times. Often this it is triggered by an event, or a political statement, or a geo-political action of aggression, made that was not expected. Covid-19 is a classic example of this. When markets have had good rallies, and especially now being on their record highs, a correction to the trend can quite easily take place. And, really, a slowdown in the pace of the rising markets would be better for long-term consolidation of gains. Similarly, a slowdown of the frenetic pace of major city residential property prices is well due!
Given the global economic horizon appears quite positive ahead, I would consider that the key possible triggers for a market correction, in the near future, could be inflation growth faster than anticipated; a regressive occurrence with the global Covid-19 battle; or even a major cybersecurity attack or incident.
Inflation is rising, so the chance of interest rates moving upward sooner than we have been led to anticipate by central banks is increasing. Moderate inflation generally means that economic growth is happening. Businesses with measured debt levels should be able to manage slightly higher interest rate as they are also having growth to counter in their business. However, rising interest rates certainly are not good for mortgage holders with high debt levels, and there appears to be quite a few out there. Nor are rising interest rates good for fixed interest bond holders. The key question is, will the growing inflation levels ahead be moderate or too much? This question should and will be very much the focus point of central banks management over the next twelve or so months.
As commented on earlier, besides the heavy human impact of Covid-19, the longer our borders remain closed, it is not good for our economy. We are a country that needs immigration for population growth and to help reduce our worker and skills shortages. We need trade and tourism. We need to be a Covid-19 vaccinated population to help properly break the lingering shackles of the virus, and to lessen the threat of troublesome strain variants of this virus.
The other current risk I mentioned to causing a market pullback, is cybersecurity risk. We are all so dependent on and immersed in information technology. It is the way of life for most of us. The year of Covid-19 accelerated the importance and use of IT to governments, businesses, and individuals alike. Yet, of late there appears to be more occurrences of attacks on ‘systems’ by hackers. Imagine the impact of a serious hack on some major global IT provider or on a government or credit card provider? As a counter, the global growth in cybersecurity companies is understandably very strong. There is not much we can do ourselves to stop ‘hacks’, however, a reminder to each of us back up our systems and information securely, and to be alert to this ever-present danger of information theft, misuse, and opening unknown emails and attachments.
Any of these above-mentioned possibilities could well prove to be catalyst(s) for a market pullback, which many cashed up buyers are longing for! Market gyrations are all part and parcel of an investor’s world, and it is important to always understand that. Investment portfolios must be maintained with this awareness in mind.
Stick to the course, the plan, and to best ensure that your investment mix is both diverse and engaged for the times ahead. Investing is not about the short-term, it is a lifelong journey. And successful investing favours the patient and disciplined investors, as we know. It is about being sensible in approach and choice, and not faltering to the traps of fear or greed when they enter the investor’s arena!
Onwards, to the new financial year ahead!
As always, should you have any queries please do not hesitate to contact us.