China, the second largest economy in the world is having some wobbles. Its economy has grown about 20 times in the past two decades and the rate of growth is slowing because such things can’t go on forever. We have seen iron ore, oil and coal prices fall in the last year – good news if you are a buyer of these commodities but no so good for sellers of energy and bulk ores such as Australia.
The financial system in China has been volatile. It had a large rise earlier in the year only to give it back again in recent falls. The Chinese Government has been intervening in the economy but it appears to be with little or no success.
Closer to home we have seen the bank shares come off in response to their need to raise capital and some concerns over the credit growth as analysts see the housing market peak.
So let’s look at the Australian share market. The chart below shows the valuation in the Australian share market being on the cheap side, but that doesn’t mean is isn’t going to drop before any bounce back. Eyeing the rolling 10 year outlook and with the recent drop, the Australian share market looks to be good value. This is priced against cash and bond rates.
Source: Robert MacLean, Equitas Wealth, 2015, Farrelleys Research and Management
So what does this all mean for high income earners, those saving for retirement and self funded retirees? Our mantra is essentially as follows:
- Overpriced assets fall most in a crisis, whether bonds, shares or property.
- If you can’t ride through investment volatility then you need to invest in cash. The very low rate of return will most likely mean you will be spending capital to fund your living expenses.
- Have sufficient liquidity and cash for emergencies. One does not want to be selling shares or investments the day they fall, so we need to have some cash at hand for this purpose.
- Excessive debt or the inability to pay the interest costs plus pay off the loan, will increase problems in the event of a crisis. It is imperative that one has a plan in place to pay off debt.
- There has to be risk in the housing market… and those with the biggest mortgages will feel it the most.
- The “old fashioned” way of making money works well. That is: First saving money, then investing it. This tried and true approach works well in all economic environments.
A correction is a normal part of markets. Again we have seen significant volatility and falls in the stock market over the last 6 months. And we have seen government intervention help and hinder economies. What happens in these moments is that everyone starts to get really anxious (from the media to analysts to investors). Just look at Greece a few months ago, nothing has been fixed and it is possibly in worse shape but it isn’t making the same headlines any more. We read in the newspapers a variety of opinions on the housing market, those who say it will correct and others saying the boom is only just starting.
Try and put the devil (and these external anxieties) at bay.