Ron Shamgar takes a quick look at five reasons he is currently bullish on the Australian equity market in spite of its recent run. With the significant intervention we are currently seeing into financial markets by both government and the central bank, Ron discusses his views on the equity market and the key top down drivers of potential return over the remainder of the calendar year.
“Down Under” QE
Since the GFC the US and European central banks have lowered their interest rates at close to zero and engaged in Quantitative Easing (QE) to spur credit growth and spending. The result has seen their respective markets, especially the US, rally significantly over the last ten years. In Australia we have not seen that yet, but we are about to. The RBA has effectively signaled to the market that if the current lower interest rate environment does not work it will engage in its own version of “Down Under” QE. The consequences of that will be rising equity markets.
The government passed a whopping $158 billion tax package which is set to boost retail spending. This should see the average tax payer save $1,080 by lodging their FY19 tax returns this month. From this, along with two consecutive rate cuts, we see consumer confidence picking up over the next few months. As we have previously seen with the last “handout”, by the Rudd government in 2007, those extra tax dollars went straight into retail spending. We have positioned our portfolios for exposure to consumer related stocks that should benefit from this uptick in spending.
Making up for a lost decade
The Australian markets have effectively gone sideways since hitting a high of 6,800 in November 2007, only recently reaching the same levels. Some would call it a lost decade. In comparison, global markets and especially US markets have had their best equities bull market in the last 100 years since the days of the GFC. During the last decade the Dow Jones Industrial index has gone from 10,000 to 27,000 (13,000 if you want to go from November 2007). We believe the main reason for this great run has been a combination of extremely low interest rates and quantitative easing policy to encourage credit growth. The RBA has recently adopted this strategy and we expect local markets to finally begin seeing the same effects. Could we be seeing new record highs over the next few years? We have positioned our portfolios in domestic and offshore growth companies that should thrive in this scenario.
Property returns to remain subdued
After twenty-five years of sustained growth in residential property prices, the last twelve months has seen national house prices drop by approximately 10% on average. With a stable government now in place, negative gearing off the agenda and a low interest rate environment we see the housing market stabilising in the near term. Unfortunately for property investors, bank lending growth has been subdued as lending criteria has tightened in the fallout of the banking royal commission. With wage growth stalling we simply don’t see how borrowers can access the debt required in order to drive house prices higher in the short term. We expect property investors to gradually begin turning their attention to equity market returns as the lacklustre property returns sink in.
Cash is no longer king
In Australia, the Reserve Bank cut rates by 25 basis points to 1.25% in June, and as of the first week of July the RBA cut rates again to 1.00%. As we have predicted all year, we expect interest rates to continue going lower as the Australian economy is not showing the signs of growth hoped for. So far retail sales have been mixed and car sales are still dropping. On the positive side the markets are continuing to climb higher and are now finally above the pre-GFC highs of 2007. With inflation running at approximately 2%, investors holding cash in the bank are, in many instances, getting negative real returns. We expect the AUD to remain weak and we have identified businesses that have large part of their earnings coming from off shore. If there is one place investors do not want to be right now - and that is cash!
Markets & Commentary
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.