Provision Newsletter

Introduction

Since the RBA started cutting interest rates again back in June and in the process taking them closer to zero there has been increasing debate that it will deploy so-called “unconventional monetary policy measures” such as negative interest rates and quantitative easing. This debate has hotted up in recent weeks after the escalation in the US-China trade war posing a rising threat to global growth, numerous central banks cutting interest rates this month in a so-called “race to zero”, the Governor of Reserve Bank of New Zealand saying that negative rates are possible and RBA Governor Lowe saying that its “prepared to do unconventional things if the circumstances warranted it” even though he also said that QE was “unlikely”. News of a Danish lender offering negative mortgage rates has only added interest to the issue. But what exactly are these unconventional monetary policy measures? Do they work? Would they work in Australia? Are there better options? Will they be deployed and when? What will it all mean for investors?

What’s behind talk of unconventional monetary policy

Put simply Australian economic growth has slowed sharply below its long-term potential reflecting the housing downturn and weak consumer spending. While house prices may be bouncing back in Sydney and Melbourne and there are anecdotes that the tax cuts are helping retailers, the downturn in housing construction has further to go and other factors from drought to the threat from the US trade wars cloud the outlook with increasing talk of recession globally. Slower growth has seen the outlook for unemployment deteriorate – at a time when there is still a high level of unemployed and underemployed (at 13.6% of the workforce). Which in turn threatens to keep wages growth and inflation lower for longer. So, with the cash rate approaching zero the question naturally arises of what to do next? Of course, Australia is not alone – with talk of recession globally, other central banks ramping up or considering the use of unconventional monetary policies and all of this being reflected in record low bond yields. Basically, there is an excess of global savings and this is driving ultra-low interest rates.

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Source: Global Financial Data, AMP Capital

What are unconventional monetary policy measures>

They refer to a bunch of policies which have been deployed by major central banks in the aftermath of the GFC. They are:

• explicit forward guidance – where the central bank indicates the cash rate is not expected to rise for some time period;

• very low and negative policy interest rates;

• quantitative easing (QE) – which has involved using printed money to purchase public and private securities;

• providing cheap funding to banks to support lending; and

• intervening to push the Australian dollar lower.

But do they work?

A common comment is that “QE etc hasn’t worked in the major economies so why should it work here?”. In reality such policies do appear to have helped notably in the US and Europe where they were progressively deployed from the time of the GFC once interest rates hit zero and then became the lone stimulus measures as fiscal austerity took hold. Since its high in 2013 unemployment in the Eurozone has fallen from 12% to 7.5% and in the US it fell from 9% in 2011 to 4% in 2017 enabling the Fed to start unwinding unconventional monetary policy. Inflation has not been returned to 2% targets, but wages growth has lifted and at the start of last year it looked like the global economy was getting back to normal. So unconventional measures have helped. Of course, Trump’s trade wars have provided a big threat since then.

The main lessons look to have been that different measures are appropriate depending on the issues facing a country, that a range of measures are preferable to just one and that central banks need to go early unlike Japan which left it too late.

Will it work in Australia?

Our assessment is that unconventional monetary policy measures may help in Australia, but it will depend on the measure deployed and their impact will be limited particularly compared to overseas. We now look at the issues around each.

Explicit forward guidance – the RBA has already started this with its comment this month that “it is reasonable to expect that an extended period of low interest rates will be required”. If the US and ECB are any guide this is likely to morph into a specific time period through which rates will remain low. This can help keep bond yields low, but the low yields in other countries dragging our yields down will arguably do this anyway.

Zero or negative interest rates – while the Fed stopped cutting rates in the GFC and its aftermath at 0-0.25% and the Bank of England stopped at 0.25%, the Bank of Japan and several European banks led by the ECB have taken rates negative. This negative rate applied to the deposit rate banks get for leaving deposits at the central bank and was motivated to encourage them to lend out cash which was building up as reserves due to quantitative easing. There is some evidence that negative rates in Europe have boosted bank lending but cut into bank profits because banks are reluctant to take interest rates on bank deposits (which are used to fund lending) below zero and so further falls in lending rates lead to reduced profit margins which may crimp lending. The thought of negative rates may also scare people. Sure a 10% bank deposit rate and 12% inflation is really no different to a -1% deposit rate and 1% inflation – but the former would feel a lot better!

For these reasons it would make sense for the RBA to call a halt to cash rate cuts around 0.5% (which we expect to see by year end) or maybe 0.25%. There would be little point in going to zero or negative as the banks will be unlikely to pass it on in lower mortgage rates as they won’t want to take deposit rates negative. So negative interest rates will hopefully be avoided.

Asset purchases under quantitative easing – QE in the US, Europe and Japan involved pumping printed money into the economy by central banks buying government bonds, high-rated private debt and, in Japan’s case, some shares. This was aimed at pushing long-term bond yields and hence borrowing costs even lower, boosting narrow money in the economy with the hope that it will be lent out, pushing investors into more risky assets to make more capital available for investing and (although they don’t admit it) pushing their currencies down. It tends to be what you do once interest rates have hit zero.

In Australia, QE may provide less help because there are less Government bonds for the RBA to buy given relatively low public debt in Australia, bond yields are already low anyway and in any case 85% of mortgage borrowing is linked to short-term interest rates and so there would be little benefit to the household sector from lower long-term bond yields.

What’s more it’s not clear that QE as practiced in other countries is the most efficient or fairest way to boost growth. There is no guarantee that the cash pumped into the economy is lent out and spent and a lot of it has just helped share markets (which is good for the better off) at a time when interest rates are low (which is not so good for lower income earners who rely more on bank deposits). More on this later.

Cheap funding for banks – the RBA did this around the time of the GFC and the ECB and the Bank of England have provided cheap financing to banks tied to them boosting lending. It’s not really an issue at present in Australia as banks are not facing difficulties in terms of funding and the recent slowdown in credit growth in Australia owes more to tighter regulatory oversight around “responsible lending”. However, following the UK experience the provision of cheap funding to banks may be a way for the RBA to ensure that cash rate cuts are continued to be passed on to lower mortgage rates and that lending holds up as the cash rate gets closer to zero.

FX intervention – this is a return to old fashioned RBA intervention in the foreign exchange market to push the $A down by selling Australian dollars and adding to its foreign exchange reserves with the aim of helping growth. It seems unlikely though as it would be criticised by other countries as competitive devaluation and the $A is already low anyway.

A better option – helicopter money?

Given the issues with some of the unconventional monetary policy measures – notably negative interest rates and quantitative easing – there may be a better way. This would be for the RBA to work with the Federal Government to use printed money to provide direct financing of government spending or “cheques in the mail” to households with use by dates. While some might say this is just “Modern Monetary Theory” in reality there is nothing “modern” about it at all (although support for MMT may help clear a path toward it). Such an approach was referred to decades ago as a “helicopter drop” by Milton Friedman. I was taught at university that government spending can be financed by tax, issuing bonds or printing money. So it’s nothing new. It’s been eschewed because of the worry that politicians will misuse it and cause hyper-inflation. But a lack of inflation is the issue now. Such an approach would be guaranteed to boost demand and eventually inflation and the spending could be targeted in a way that is seen as fair. To provide a lasting boost to inflation without running out of control it could be set up to continue until certain objectives are met then gradually phased down. Hopefully, it won’t come that, but it’s a preferable option to the hit and miss of just relying on alternative monetary policy measures. In the meantime, more fiscal stimulus could take some pressure off the RBA.

Will the RBA deploy unconventional policies?

The RBA is likely to exhaust conventional easing by cutting the cash rate to 0.25-0.5% before doing unconventional measures beyond forward guidance. The probability of other measures next year is rising. Negative interest rates are unlikely but quantitative easing would likely be included. Ideally this would involve working with the Government to provide a fiscal boost.

Implications for investors?

There are a number of implications for investors. First, bank deposit rates are likely to fall even further and remain unattractive for a lengthy period yet. Second, the low interest rate environment means the chase for yield is likely to continue supporting commercial property, infrastructure and shares offering sustainable high dividends. The grossed-up yield on shares remains far superior to the yield on bank deposits. Investors need to consider what is most important – getting a decent income flow from their investment or absolute stability in the capital value of that investment.

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Source: RBA, Bloomberg, AMP Capital

Third, the continuing low interest rate environment will support Australian residential property prices, but still high debt levels, tight lending conditions and rising unemployment mean that it’s unlikely to set off another full-blown property boom.

Finally, easy monetary policy in Australia will likely help keep the $A lower than it otherwise would be.

If you would like to discuss any of the issues raised by Dr Oliver, please call on |PHONE| or email |STAFFEMAIL|. 

Author: Dr Shane Oliver, Head of Investment Strategy and Chief Economist

Source: AMP Capital 28th August 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

If you’re prone to procrastination, you’re certainly not alone. When there’s so much to do, it’s all too easy to postpone action because you can’t quite bring yourself to get started. Most things feel like overwhelming hurdles, until you take the first step towards completion. It’s this first step that gets the ball rolling, so all you need to do, is find the motivation to take it.

Here’s how to do it, quickly. 

Change your body language

Do you often slump over the laptop, amble reluctantly to your next meeting or sit with your arms and legs crossed? Postures and gestures you use not only communicate something to everyone around you, but affect your mood and productivity levels. As soon as you feel procrastination taking over, check in with your body to see how you’re sitting, standing or walking. 

Instead of any posture that makes you look and feel small, slumped and tightly crossed, open up and stretch confidently, by extending your chest, arms and legs. Walk briskly and with purpose, while taking deep breaths. Smile, even if it’s just to yourself. These small changes tell your brain to get going, in a mere matter of minutes. 

Become aware of your thoughts

Like most things, motivation is a skill that takes practice to cultivate. When you’re constantly telling yourself you can’t achieve goals, finish projects or even get out of bed, your putting yourself into a pessimistic state that blocks action. To change this, it’s crucial to remain aware of your thought patterns. This is the easy part, because the signs of negative thinking are starkly obvious, via the associated negative feelings. 

As soon as you feel yourself succumbing to non-productive thoughts, whip them into shape by reframing them in a positive light. Mentally debate them if you need to, by acknowledging that they’re not necessarily true. For example, while today’s ‘to-do’ list might seem overwhelming, is it true that it’s entirely unachievable? Not likely. If it is, adjust your thinking by focusing on proactive solutions, rather than the feeling of being overwhelmed. 

Simplify your goals

No matter how motivated you are when you start the day, if your goals aren’t measurable it’s far too easy to sink into non-action. Let’s say your goal is to get fit, which is something that’s not going to happen overnight. Without specific, measurable steps to take each day, it’s not going to happen at all. 

While it’s fantastic to have long term goals and even better to reach high, it’s these very aspirations that can hold you back by projecting too far into the future. It’s in this ‘future thinking’ space that goals seem unattainable, thereby squashing your motivation to get started. 

When you find yourself procrastinating, give your motivation a boost in minutes by kicking one, simple goal that puts you one step further on the path. In this case, get up and go for a quick jog, and pat yourself on the back for it afterwards. 

Practice taking small steps and rewarding yourself for them, changing your body language and reframing your thoughts towards positivity every day. You’ll soon find your motivation muscles growing stronger, in order to propel you towards successful action and working smarter, not harder. 

This provides general information and hasn’t taken your circumstances into account. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page

For the first-time business owner, your ability to control costs is a critical success factor. But have you factored in these often-overlooked costs of running a business?

What could be more cost-effective than starting your own small business from home?

No mandatory commute means money saved. No managers or investors to keep most of the profit for themselves and no (additional) rental overheads.

For many, it sounds like the perfect antidote to a busy, expensive lifestyle. But is it?

Truth is, running a business carries various costs that are easy to overlook, even if you’re operating it out of your parents’ garage. And if you don’t prepare for all eventualities, you can find your dream business has become a financial nightmare.

To help you get prepared for running your own startup, here are five hidden costs of running a business from home.

1. Your working time

The irony is many entrepreneurs begin working for themselves to better value their time, but most of them completely fail to do so.

Instead, they fall into the habit of trying to do everything themselves, assuming their effort is innately productive – but that isn’t the case.

Part of the reason for this is that it’s possible to value your time in an abstract sense (recognising that you have useful skills) without monetarily valuing it.

As a business owner, you need to understand what every hour of your time is worth and use that as a yardstick to figure out what you should (and shouldn’t) be spending your time doing.

READ: How to price services when starting a business

2. Staff (full-time or freelance)

The dream of flying solo isn’t sustainable if you have any ambition to scale your offering.

There’s only so much a person can accomplish in a day, no matter how skilled or dedicated they are. Sooner or later you need to start building a team.

Why is this a hidden cost? Because however inevitable it may be, it’s all too easy to ‘kick the can down the road’ and treat it as something that might happen one day but isn’t an immediate priority.

But, if you know you’ll need employees worth investing in some day, you need the funds to offer competitive salaries, and that requires preparation and saving.

READ: Freelance of full-time? Here’s a simple formula for hiring talent

3. Business software subscriptions

Without the advent of software-as-a-service (SaaS), or cloud-based software, it wouldn’t be possible for a lone entrepreneur to build a scalable online business.

From your word processor to your website, if it’s digital then it can be delivered over the internet for a relatively low monthly rate.

One obvious example of a business-critical solution is your online accounting software. Incorporating this type of software early on makes it easier to get paid faster with automated invoices, capture your receipts and prepare cash flow forecasts.

Many new business starters figure they can do all this manually, but your time is valuable, and much better spent on other things. Furthermore, the introduction of Single Touch Payroll in Australia and Payday Filing in New Zealand means that, if you intend to employ staff, you will need to acquire this kind of software to report salaries and super with each pay run.

There can be also be hidden costs in choosing between SaaS utilities. What you think is the best deal might work out as more expensive in the long run. I follow e-commerce closely, and both Shopify and BigCommerce are great website hosting solutions, with the latter being nominally cheaper – but the former’s native multichannel selling, automation options and higher growth rate may justify the higher and ultimately make it cheaper as your business scales.

READ: Understanding business systems

Ultimately, the right software solution for your business will come down to your individual circumstances, so be sure to consider your options carefully.

4. Industry memberships

These costs can really take people by surprise, because many people don’t know they exist.

Industry memberships are sometimes mandatory, but more often simply recommended, and involve businesses joining governing bodies (of sorts) that oversee their industries – whether regionally or internationally. The ACCC lists a number of these industry associations on its website, while New Zealand also have an array of industry and trade associations.

For instance, if you ran a decorating business, you may need to join a regulatory body tasked with making sure all decorators are working safely and correctly (depending on the country). And even if you require no such membership at the moment, are you certain that you won’t pivot your business down the line?

5. Insurance policies

When you start running your business, you’re riding on a wave of optimism. Finally, everything’s going to go your way. You’ll make the money you were previously denied, have the freedom you always craved, and be able to truly express yourself – but things won’t always go your way, and unless you want to hit a bump in the road and crash, you need business insurance.

READ: Considering insurance for a new business? Start here

Depending on the type, breadth and level of insurance you go for, this can be a modest cost or a massive one. Either way, it’s not something that any business owner should ignore.

The long-term survival of your fledgling business is more important than your early profit levels, so take it seriously, shop around to find the best insurance deal, and get your operation covered.

These costs can sneak up on you if you’re not careful, so pay close attention. Running your own business can be hugely rewarding, but it will turn into a negative experience if you hit financial troubles.

Source : MYOB

Reproduced with the permission of MYOB. This article by Kayleigh Alexandra was originally published at https://www.myob.com/au/blog/hidden-costs-running-business/

Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Love it or hate it, outsourcing work to a third party presents obvious benefits for businesses. So if you’re wondering why companies outsource a specific element of their activity, the following article paints the picture.

Often a business owner may think they can do it all, especially founders of small businesses and taking such a standpoint can literally make or break a company’s growth potential.

For those that recognise that there are only so many hours in a day, it stands to reason that outsourcing should be viewed as a bread-and-butter strategy for businesses today.

What do the numbers on outsourcing reveal?

According to Microsourcing.com, the progress of technology has given businesses a monumental edge when it comes to remote workers. This has increased the offshore outsourcing industry astronomically in nearly every category.

Respondents to a survey from Microsourcing gave the following as reasons for outsourcing:

• 59 percent said it was cost-cutting tool

• 57 percent said it enables them to focus more on their core business

• 47 percent said it helps to solve capacity issues

• 31 percent said outsourcing enhances their quality of service

• 28 percent described it as critical to business needs

• 17 percent said outsourcing is used to manage the business environment

• 17 percent indicated it drives broader transformational change

Further studies disclose, as reported by the site, that for every four jobs forfeited another automaton management position is created. What’s more, outsourcing of higher level positions is on the increase.

Adding to the trend are innovative software alternatives that provide superior time-tracking features. These features effortlessly bestow businesses with a hands-on approach even when miles away.

6 key benefits of outsourcing for businesses in a nutshell

1. It delivers a competitive edge

This advantage applies particularly to small business owners.

With the help of a remote working techniques, in-house and outsourced roles can be brought together though they may be scattered across different cities, states, or countries. When managed well, this allows a small organisation the same level of access to talent as a much larger one.

2. It helps businesses manage capital expenditures

Instead of paying a fixed monthly wage to a full-time worker, outsourcing offers a business the benefit of spending only where and when needed, thereby leveraging more control over business assets. The added revenue stockpile can be directed towards marketing or investing in supplementary services.

Research has also shown outsourcing is particularly cost effective for small business owners as they are relieved of the need to pay operating costs associated with worker’s compensation schemes, health insurance, payroll taxes, and office space (although you’ll want to ensure you’re complying with the letter of the law for your region).

3. Outsourcing frees up capacity for increased undertakings

Another upside of outsourcing is the opportunity for businesses to innovate and kick-off projects more frequently.

This is mainly derived from the on-the-spot expertise outsourced help provides. For example, a company can manage time better by outsourcing right away as opposed to employing, hiring, and instructing a new, full-time employee.

READ: What I’ve learnt from outsourcing payroll

4. Third party providers are often highly motivated

If a worker lacks the expertise required for a specific job, a company can outsource the task with an added bonus by default. This means a contracted worker will probably be more enthusiastic and motivated to do a superb job with the hopes of getting commissioned for future assignments.

5. It gives greater access to core competencies

Another great benefit to outsourcing is the advantage of accessing others’ core competencies as well as a better ability to focus on your own.

Core competence concentrates on targeted skills that make a company unique in itself. It’s that “something” that makes it stand out from its competitors.

READ: Why you should stick to your strengths in business

Investopedia defines core competence as:

‘The resources and/or strategic advantages of a business, including the combination of pooled knowledge and technical capacities, that allow it to be competitive in the marketplace. They are what the company does best and consist of the combined activities, operations, and resources that distinguish the company from competitors.”

6. Outsourcing gives small businesses a step up

Rarely do small businesses carry the clout of larger companies. Despite that, outsourcing gives small businesses a step up by leveling the playing field due to access to highly-skilled labour and expertise that bigger companies favour.

When’s the best time to outsource?

The perfect time to outsource varies with each company.

A business may maintain a limited staff and only require outside assistance for specific tasks. Another company may have adequate staff but require help when taking on additional projects.

When day-to-day operations of a business becomes overwhelming, outsourcing is the ideal solution.

The sticky issue of finance

Finances are an unavoidable sticking point when it comes to managing a business. Hiring the services of a competent financial adviser is the best way to allocate finances when outsourcing.

Additionally, making such a decision allows businesses to focus on other important areas like development and customer service. Business owners should “concentrate on what they are good at.”

If not, precious time will be taken from the company that could be better invested in other crucial business endeavors.

A final word on outsourcing

Both large and small businesses are increasingly outsourcing work due to the innovation of technology.

The ability to hire workers from anywhere in the world with the click of a mouse is quite impressive. In fact, many professionals like marketing directors, paralegals, virtual executive assistants, IT professionals, and so on, are leaving the nine-to-five workday in order to enjoy more time with their families or pursue other interests while maintaining a decent salary.

When business owners can invest more time and energy in growth opportunities instead of stressing about tasks better suited to others, then outsourcing has achieved its goal.

Source : MYOB

Reproduced with the permission of MYOB. This article by John Larase was originally published at www.myob.com/au/blog/ outsourcing-key-benefits-small-business/

Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

In this article, we look at three possible scenarios that could unfold in global equity markets over the next five years – are the roaring 20’s upon us, or is there reason to tread more carefully as we head into the next decade?

Key points:

1. There are three main possible outcomes in markets over the next few years: a recession, the bull-market continues or the status quo.

2. Money supply and the cost of money is a big driver of equity markets – and this is one reason why they made such strong progress in the first half of 2019.

3. Assuming no major recession in the next five years, the most sensible prediction for equities is that they perform in line with company profits growth; modest but positive.

Looking backwards to move forwards

Past performance is not indicative of future returns, but lessons can be learned from historic market events to help investors to take a forward-looking view. The last few years have been good for equity investors – It’s been a bull market and one that has been led by the US.

Since the start of 2012, the US market (S&P 500 Index) has more than doubled (up approximately 170%, including dividends), while the MSCI All Countries World Index is up 75% (around 110% on a total return basis) in US dollar terms1. Valuations have not changed that much, which means that the world, as a whole, is valued (against the current earnings base) at roughly the same level as it was five years ago. Technology has produced the best earnings and the best performance but has become more expensive. Conversely, slower growth areas (financials, industrials and materials) have become cheaper.

More recently, fears of impending recession have caused more money to move into perceived lower-risk high quality companies. The premium for “quality” has risen to levels never seen before, particularly in Europe.

What does the next five years hold for equity markets?

Given that markets are not that far from long-run average valuation levels in relation to current earnings (and are cheaper than 30-year averages on free cash flow valuation), probably the most sensible prediction s is that equity markets perform in line with company profits growth. This will be fairly modest but should be positive if we assume no major recession in the next few years.

The longer one’s time horizon, the more important earnings growth is in explaining market moves. However, over shorter periods, other factors introduce greater volatility that overwhelms the impetus from earnings (in either direction). In particular, money supply and the cost of money is a big driver – and this is one reason why markets made such strong progress in the first half of 2019.

It is helpful to consider three possible world scenarios for the next five years.

Under the first, we see recession and a fall in corporate profits. Under the second, markets rise significantly on a combination of higher earnings and higher valuations. Under the third, there is little if any earnings growth and markets stay roughly where they are. Whilst the middle path is the one that seems to make most sense to plan for, it appears that the “melt up” scenario is more plausible than the “collapse” case.

Scenario 1: Recession?

Although it is difficult to quantify the risks of a major geopolitical incident, a significant economic downturn seems unlikely in the next few years. In the past, classic recessions were caused by overinvestment and declining industrial returns but there is no evidence that economies have been adding too much capacity. (Indeed, healthy profit margins in many industries are evidence of this.)

Equally, a recession caused by a stressed banking system seems also highly unlikely given that around the developed world banks have rebuilt capital and a large part of the riskier assets have been removed from balance sheets and are now held by hedge funds and other investors.

A more likely recession scenario is the “Japanese style” recession that we have seen a number of times in the past 30 years. These are short-term downturns, often caused by industrial inventory cycles, that are met with monetary stimulus and government spending initiatives. This can lead to opportunities to pick up oversold stocks at the gloomiest moments.

Scenario 2: The Bull market continues?

As monetary policy remains loose (and may ease further) and it is highly likely that governments will step up spending to mitigate economic softness, there is a reasonable chance that markets rise to higher valuations. After all, the last five years have seen markets rise despite investors taking money out of equity mutual funds.

Now that equities provide a dividend yield that is significantly higher than government bonds and offer some potential inflationary protection, maybe investors will allocate more to equities in the next five years. A major “melt up” in markets cannot be a central case but could be argued to be at least as likely as a major correction.

Scenario 3: Status quo?

In the more likely scenario of low global growth (lower than the past few years due to geopolitical and trade uncertainty), earnings can be expected to grow at a modest pace. Free cash flow is a positive and should continue to drive share buybacks which in turn augments underlying growth in earnings-per-share.

In this relatively low growth scenario, we should also expect periods of volatility in markets. Rather than trying to avoid them entirely, we should be ready to look for opportunities that will be thrown up along the way.

In part two of this piece we outline six key themes that we believe investors need to consider over the next five years and discuss how these issues could shape and impact market leadership from here.

Source : Fidelity August 2019 

Reproduced with permission of Fidelity Australia. This article was originally published at https://www.fidelity.com.auinsights/investment-articles/rumble-or-roar-the-future-for-global-equity-markets/

This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity Australia’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.
© 2019. FIL Responsible Entity (Australia) Limited.

Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Information overload is a modern day problem.

Between smartphones, websites and watches that alert you even when you have ignored the phone, it is hard, if not impossible, to tune out the noise of the world. Trade wars, Brexit, currency slumps, geopolitical tensions are just the headlines that can dominate the news cycle on any given day at the moment. Thankfully the Australian cricket team provided some welcome relief – and restored a little national pride – at Edgbaston.

Vanguard has been publishing its annual index chart that plots the performance of all the major markets and asset class indices for Australian investors for 18 years. It allows investors to look at how markets have rewarded them for the risk they have taken through periods of market rises and periodic slumps.

This year’s chart provides the data to June 30 2019, and naturally there is always a tendency to focus on what has topped the performance table – US shares at 10.3 per cent per annum is the answer – and while interesting, that is not the key message from the chart.

The core message – and the reason for continuing to publish it over such an extended period of time – is to understand the power of markets over the long-term.

Think of a major event that roiled investment markets and look at that point on the chart – the last Australian recession in 1992 or the collapse of Lehman Bros, for example, in 2008 – to understand its impact at the time. Then zoom out to see how it affected returns over the full 30-year time period covered by the chart.

The other message provided by the index chart that is sometimes lost in translation is when investors lean towards wanting to predict what will be the top performing asset class next year… and the year after that.

You can view the digital version of the chart here (or order a print copy here) but if you are tempted to try and time markets, it’s worth taking a look at page four of the index chart brochure which has a table of the total returns across all the major asset classes featured in the chart.

The best and worst performing asset classes are highlighted across each year – and feel free to let us know if you spot a performance pattern because what we see is what Burton Malkiel captured so elegantly in his investment classic, A Random Walk Down Wall Street.

The index chart shows the performance of markets over the long-term, but for individual investors its value is in understanding how you blend all of those markets to create a portfolio with the right asset allocation to achieve your investment goals within a risk level that you are comfortable with.

For investors a sense of perspective is a critical tool in the armory that can help tune out short-term noise, focus on your long-term goals and, as the legendary founder of Vanguard, Jack Bogle said, help you to “stay the course”. 

Please contact us on |PHONE| if you would seek further discussion on this topic.

Source : Vanguard August 2019 

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2019 Vanguard Investments Australia Ltd. All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.