Investments: Is Now the Time to be Bullish?

Investors are generally an optimistic group and many would suggest the mere presence of “confidence” is all that is needed to swing markets in our favour.

So given the following:

• The American share market at close to an all-time high
• The stellar performance of the Australian share market in the previous financial year (all ordinaries up 17.2%)
• Recent rises in residential property prices
• US data showing an improving economy
• Record low interest rates

Isn’t now the time to be reweighting to growth assets, and even consider gearing strategies?

Not according to Richard Duncan of Richard Duncan Economics.  Despite recent positive data and performance of markets, he cites the following as significant issues still to be resolved in his recent newsletter:

Quantitative Easing
In September 2012 QE 3 was launched and in January it doubled to $85 billion a month.  This has resulted in a wealth effect with rising stock markets and property prices, yet the economy is still weak with GDP increasing only 1.8% in the first quarter.

US Imports
Despite the massive injection of liquidity, US imports are not growing and they have historically been the driver of global growth.

Credit Growth
Credit growth drives economic growth.  Between 1952 and 2007, there were only 9 times when credit grew by less than 2% and every time that happened, there was a recession.  The ratio of total credit to GDP has risen from 160% in the US in 1980 to 370% in 2008.

Will QE Work?
The theory is QE will help the economy get through this hump and sustain itself in time.  Will it work?  We don’t know as we have never been in a situation where the Fed Funds Rate is zero and the Fed is also printing trillions of dollars of paper money.  This is credit growth, and growth in the amount of US dollars in circulation, at a massive scale.

Cheaper energy and a lowering of other input costs such as labour, has the potential for a much more competitive industry in the US and is driving much of the optimism.  However, lowering disposable income has the reverse effect of making higher debt levels in a rising interest rate environment (when things normalise), possibly unsustainable.


What about Australia?
We face similar issues to the US given the recent revision of our budget showing a sharp decline.  And we are at the mercy of world growth.  The reality is Chinese growth is still highly dependent on US imports and hence, US economic performance will have a significant impact on us.

Whilst recent share market gains have been welcomed, we are in unchartered economic waters and maintaining a truly diversified portfolio, we believe, continues to be a sensible approach.


Aaron McCracken
Private Wealth Adviser