I have been writing a prelude to the coming year for a number of years now. And to steal from various quotes: The longer we look at it the more interesting our times become.
As I reflect on the last few years, I see 2008 and the GFC as an inflection point in global thinking and that is now 10 years ago, not a memory for younger generations, but still front of mind for those who were inventors though the period.
Until then the world was focused on globalisation. Since then we have seen more and more events retreat from that view and move to “what about me”. Everything from Trump and Brexit, to the Scottish vote a few years back, to the Greeks telling the EU to stick it, is evidence of the change in global thinking. And the second half of last year we saw North Korea occupy headlines. This isn’t something new, remember they have had a demarcation since the 1950s, and every decade since the 1960s there is a James Bond film with North Korea as the bad guy.
In spite of all this, the world as expected is getting on with it.
If you look at consumer confidence over recent years it has been relatively high, with business confidence lower. We now see a shift to more subdued consumer confidence and more robust business confidence.
Business tends to be less focused on the noise and judge what the actual economy and its business is doing. Consumers are more influenced by the media. Right now, I think business has a better handle on things.
We know that change – be it on the global stage or our NSW Premier – can make everyone from the media to analysts to investors and consumers really nervous:
- volatility and falls in the stock market
- government intervention in to economies
- interest rates at historical lows
- a diversity of opinion on the housing market from those who say it will correct to those saying the boom is only just getting started
- government policy unable to keep up with the changing economy and business.
Throughout 2018 global machinations will impact on economies, financial markets and on confidence as it always does.
The big issues for Australians continues as for the last few years:
- what do we want from the Government
- how can we pay for it
- what can we afford
The foremost issue for the Australian Government is that spending on retirement incomes, health and welfare is increasing while revenue (i.e. tax) is, at best, neutral.
Making the big decisions to address this dilemma doesn’t seem to be on anyone’s agenda and in the absence of a forward vision, the narrative comes down to “what’s in it for me”.
I think the only certainty is that taxes will rise.
The take out message for high net worth and higher income individuals is that if we expect taxes to rise then robust tax management becomes more important. Effective asset and financial structuring, such as using family trusts, makes more and more sense towards protecting and growing assets.
The take out from the chart below is clear: interest rates in Australia are lower than anyone can remember. Yet they are still higher than in many other developed economies. At some point they will rise, we have been saying this for some time and we may end up getting it right.
If you think house prices are not linked to interest rates, look at the chart below. As interest rates have been falling since the late 1980s, house prices have risen in line with the fall. The question remains, what will happen to housing prices when rates rise. We saw the housing market top in mid-year and this seems to reflect a typical bull run, where prices rise for 2-4 years then suddenly stop, as everyone who wants a new house has bought one, and everyone else seems to think they are expensive.
Graph 1. RBA Interest Rates 1985 – 2018 and Sydney Established House Price Index
Source: Reserve Bank of Australia, 2018 and ABS data
The Australian Stock market has largely been trading sideways since 2010. Following a dip in 2010/11 against the backdrop of Euro and Greek debt crisis, then a recovery, was a drop in 2016 leading to the US election and Brexit, both with quick bounce backs in 2017. There is not a lot of growth, nonetheless investors are getting reasonable returns from dividends and franking (tax) credits.
Below is our current view of the Australian Share Market.
Graph 2. ASX 200 Share Price Valuation
Source: Equitas Wealth Pty Ltd & Farrelly Research & Management Pty Ltd
Whilst it is not possible to pick the top or bottom of markets, it is possible to determine valuation. By our valuation, the share market has been fairly priced for the last five years but still isn’t making much headway.
Infrastructure investment in Sydney is higher than we have seen in generations, and we expect this to have a positive impact for years to come. There are always risks: some infrastructure projects will come to fruition and some will just disappear.
In summary, my perspective on 2018 looks like this:
Interest rates will remain at relative low interest rates but will rise slightly in the medium term.
As it has been for the last few years, the Australian Share Market is fair value but cannot grow dramatically without company profits growing and companies growing their revenue.
All governments including the Australian Federal Government will be looking for ways to increase tax, including tinkering with government benefits.
I expect the noise from Global markets to continue and on topics from Brexit (and other EU countries lining up to do the same), to taxing global companies, to oil pricing, to Trump and North Korea and China.
And lastly, the only certainty seems to be more and more apartments being built whether there is anyone to live in them or not.
Our outlook continues to remain positive – Australia is in good shape. Business continues to look positive, meaning potentially more business investment, which is good for both jobs and the economy.