Well, it’s happening. Australia is reaching vaccine levels that are permitting for more and more ‘back to normal’. A week into the significant easing of the Covid-19 lockdown restrictions, and you can see and feel the difference already. The good side of this being more people out and about, increased social interaction, including families being able to re-assemble from lockdown restrictions. Most businesses are more active again, and the others are just back to reopening stage and revving up. People are spending, booking flights and trips. The bad side is the price of everything is up, traffic is back, queues are long, and there is still, understandably, shortages of supplies because of sheer demand, coupled with supply chains still not back to necessary levels of movement. Very similar scenario to which many overseas countries experienced in the past few months with their own earlier easing of restrictions.

In Deloitte Access Economics’ most recent economic briefing, it notes that “…2020 showed us that the Australian economy and labour market do have the capacity to bounce back. And this time around we have a weapon in our arsenal that we did not have in 2020 – vaccines. Vaccinations are the best possible stimulus for our ailing economy – and forecasts for everything, from wages to unemployment and hospitalisation to haircuts, depend on vaccinations. That’s why, despite the current economic pain, we’re still forecasting a substantial return to growth.” 

The other side to consider besides household consumption growth and increased spending is, of course, what will businesses do from here. The latest NAB Australian business survey shows confidence rising.  In its latest Market recap report, JP Morgan comments on consumers and companies outlooks in saying, “The spending power of consumers and the expected release of pent-up demand is a well-documented reason to see the recent moderation of economic growth as a slowdown rather than the start of a down-cycle in economic activity. However, the consumer is only half the story and the supportive dynamics for companies to spend will add another pillar to the still robust global growth outlook. Capital goods shipments across G3 economies have greatly outpaced what was experienced coming out of the last two recessions (Deloitte noted about shipments that, relative to 2019 – just pre-Covid 19 times – global shipping costs have jumped almost four-fold!). Extremely low financing costs, as well as record profits, means companies are flush with cash to spend. Some of this spending may also be in response to not being able to source enough labour. Either way, business surveys on capital expenditure intentions are near the peaks seen during the prior expansion, suggesting that corporate investment will continue in the year ahead”. As noted before, corporate earnings results have surprised more and more on the upside.

And, yes, the increased waggle in the tail of rising inflation is causing, predictably, markets to have had a bit of volatility in the past month. Nothing unexpected. It is hard to find goods, services, materials, oil and energy, utilities, real assets that have not gone up in price!  It is now a question of how much of this inflation is only transitory, and how much is more entrenched. The days of ultra-cheap debt and record low interest rates are certainly numbered. 

The RBA here has the tough task now of keeping to its ‘promise’ not to raise interest rates until 2023 or later. It will have to do so earlier, much earlier, in my opinion. We know that some other countries central banks have already started to put official interest rates up e.g. New Zealand, Norway and, very probably, soon the UK. With US CPI inflation running now at the level of 5.4% year on year, it is hard not to see the US Fed also pulling the rate trigger early next year. Any increase in rates will be done with caution, no doubt. The challenge is getting the timing right for any rate rises to minimalise unwanted negative impact. This is what central banks are meant to do; get the balance and the timing of it to be as right as possible!  

If the RBA here is effectively forced to raise official rates sooner, it will have to grapple with how to slow down the property price juggernaut without causing a residential property correction considered big enough to really be a crash. With the exuberant amount of residential property debt, his would almost certainly happen if it raised rates too quickly. The RBA has already started its tapering program, thereby reducing cash injected into the system. It could also be a case of just letting market forces come back to play; meaning house prices are just too high because of artificially low record interest rates, and easy home loan money. Some normality is needed presuming the ‘post’ Covid-19 global recovery occurs as is greatly anticipated, and what is hoped for.

There is always talk and speculation which way is the market going next; and further volatility and adjustment to the world ‘returning to more normality’ is likely ahead. For traders, this is their existence. For investors, it is not so, and certainly should not be. Short-term gyrations are far less relevant because of investors longer timeframe, allied with their predominant reasons for investing, which are to get growth and income from their investments which they build up over time. Good investors are builders with patience and understanding, and who want quality assets in their portfolios that will deliver, over time, solid and consistent income flows. Growth will come with through as well, as businesses grow and reinvest in themselves. Dividends returns will grow, in dollar terms at least, as dividends paid as a percentage tend remain consistent. 

Some reinforcement information on all this I recently received from a fund manager. Over the past 20 years, the S&P ASX 300 Dividend Income on shares has been, on average, about 4.5% p/a, plus beneficial franking credits on top of that cash return. If you put in $100,000 into the S&P ASX 300 Index some 24 years ago, but you spent the dividends, your investment would be worth around 2.82 times the original capital amount (i.e. after dividends paid out). Yet, if you bought this same Index and reinvested all the dividends as they were received, then your investment would be worth about 7.28 times its original capital amount. (This does not take any possible tax into consideration). And, in those 24 years, we have seen many, many world impacting events happen, such the GFC, 9/11, and Covid-19, and so on. But, as the world evolves, investing goes on.

The above provides quick illustration of the consistency of dividend income over time; the need for real returns; the power of investing, the power of time in the market, the power which compounding provides to such an investment over time.

“The price of discipline is nothing compared to the price of regret” (writer, Robin Sharma) How true.

As always, should you have any queries please do not hesitate to contact us.