Citi Conference: Market Outlook and Your Portfolio
Last week Libero Capital attended the Citi Investment Conference in Sydney, a key annual event in the investment management industry calendar, involving formal presentations and panels by industry leaders, economic analysts and political figures. Below we present some of the key takeaways and their potential implications for your investment portfolio.
Maiden Speech by RBA Governor Phil Lowe
Firstly the new Governor used the opportunity to explain the current low return, low inflation environment. He cited a number of underlying factors, such as falling commodity prices, excess slack in the economy after a long period of strong growth, globalisation and its effect on wages and the ongoing hangover from the GFC. However he was at pains to point out that he does not expect this period to last forever. Eventually excess capacity in the economy will be worked through, commodity prices will rebound, and new industries and competition will generate growth. In the meantime the RBA is using its lever of monetary policy (via interest rate cuts) to help stimulate that growth.
Dr Lowe also used his speech to defend criticism the board has received in relation to the effect of recent rate cuts on Sydney house prices, stating that according to their data housing credit growth is slowing. However he did admit that that the lack of affordability is a rising concern. Combining this with other comments he made regarding the tapering of stimulus globally, it was hard not to interpret the RBA’s stance as now being less “dovish” than in the past. In finance language essentially meaning that the likely pace and extent of future rate cuts is diminishing.
He also carefully and subtly redirected some pressure back on the government, highlighting that monetary policy (which is the only mechanism the RBA has direct control over) is only one of three levers needed to prop up Australian growth and living standards. The other two, structural reform and infrastructure spending, are very much in the governments hands, with Dr Lowe intimating that both of those will need to be addressed in order to safely avoid a wider economic slowdown, particularly as the East Coast private construction boom begins to fade.
US Political Environment
Former US Treasury Secretary Larry Summers spoke by video conference from the US. As things currently stand, he believes the likelihood of Donald Trump becoming the next US president is falling. From Hillary Clinton he expects more of the same economic policies as under Obama, but with a larger emphasis on much needed infrastructure spending, which he feels is the next and now crucial step in reigniting the US economy. He also expects a gradual but firm move towards interest rate rises by the US Fed, which will likely put upward pressure on the USD and therefore downward pressure on the AUD.
Australian Residential Property
A panel discussion on residential property highlighted the different nature of this residential cycle compared with previous cycles, due to the unusual environment of ultra-low interest rates. The panel expects house price growth to moderate over the next year in Melb and Sydney, but not fall if low rates remain. However there is rising concern regarding apartment oversupply, with Nigel Satterley commenting that he expects some builders to “go bust” in Brisbane or Perth in the next 6 months as settlement risks rise. There was some disagreement as to whether this would have a ripple effect into broader dwelling prices.
China is currently facing the challenge of a policy “Trilemma” in trying to manage three competing goals: 1) Maintain GDP growth at 6.5%. 2) Implement reforms to make their economy less dependent on exports (unsustainable) and more on home grown demand from its rising middle class. 3) Ensure financial and social stability. It also needs to navigate a potential housing bubble and substantial capital outflows. In its favour however is a strong central government more inclined to do “whatever it takes”, without being subject to the same political constraints as its Western counterparts.
The Outlook for Investment Markets and your Portfolio
The consensus among the speakers was that in the short term market returns are likely to remain subdued. For the time being we are in a low economic growth world. Since the GFC, falling interest rates from central bank stimulus have resulted in strong increases in asset prices (and therefore reasonable market returns). However now that interest rates are close to as low as they are likely to go, further asset price gains are going to be dependent on the emergence of real underlying economic growth, which may take time. This is the case both domestically and internationally. However sooner or later a recovery in growth will take hold, even if the exact timing is difficult to predict as Dr Lowe pointed out in his speech.
With interest rates so low and the return on cash barely keeping up with inflation, the key is to remain invested in a well-diversified portfolio managed to your appropriate level of risk. It is very important to avoid trying to chase higher returns by taking on more risk or investing in riskier assets, as markets can become volatile quickly, particularly given the current global political and economic environment. As is always the case, it’s about “time in the market, not timing the market”.
If you wish to discuss this note, or have any queries in general regarding your portfolio or the market outlook, please don’t hesitate to call my direct office line, ph: 02 9119 3698.
Glen Holder, BCom, DipFP, MAppFin, CA
Director – Investment Management