By Greg Bright
A consensus of pundits drawn out by the media in its time of need – when there is little actual news to report – seems to be warning about both a further slowdown in the Australian economy and a relatively lacklustre sharemarket this year.
Normally the two don’t go together, or, rather, there is usually a significant lag between economic indicators and the “real” economy. But Vanguard did a 100-year study a few years ago, supporting similar studies before it, that showed almost zero correlation between economic performance, using standard GDP measures, and sharemarket performance, with or without adjustments for lags.
So, if the Australian sharemarket is relatively lacklustre, compared with other markets, what can be to blame if not the economy? Someone else’s economy? Irrational sentiment? Something else? Here are some possibilities which may or may not have a negative bearing on the Australian sharemarket this year.
1. Other markets will perform better. It’s a relative thing, after all. The worst performing sharemarket in the Asia Pacific region last year was China, down 6 per cent. The previous year, China was the worst performing sharemarket in the world, down more than 50 per cent. Japan was the best last year, up 40 per cent, mostly in the last few months due to pump-priming by the Government. There are big risks attached to both countries, particularly Japan. Any cracks overseas, though, should be cushioned by a declining Aussie dollar. Emerging markets generally came off the top last year and are now showing signs of attracting renewed investor interest.
2. Unemployment. The main driver of consumer sentiment, credit and mortgage defaults, unemployment is on the rise. Unemployment edged up from 5.7 per cent to 5.8 per cent in November and is expected to top 6.0 per cent this year. More disturbing is hidden unemployment due to Australia’s high proportion of small businesses. Australia has 11 million tax payers and 10.8 million registered businesses, according to ASIC. How many are at full capacity?
3. House prices go into reverse. Sydney house and unit prices were up 14.5 per cent last year and Melbourne 8.5 per cent. It may not be a bubble but it’s certainly inflating.
4. China. More of a riddle than Russia, China’s economy continues to defy the pundits, last year picking up against a medium-term trend of slowdown. The slowdown is likely to continue in a reasonably controlled fashion. But the non-bank credit problem has not been addressed and could cause a meltdown at some stage.
5. A new war. Forget Japan and China coming to blows, the Middle East remains the world’s major trouble spot. According to the “Centre for Preventive Action” an affiliate organization of the US Council on Foreign Relations, most likely are: limited military intervention in Syria; a US strike against Iran; strengthening of Al Qaeda on the Arabian Peninsula; civil war in Iraq; a spillover from the Syrian conflict into Jordan; a major terrorist attack on the US or an ally; a border clash between China and India; a North Korean crisis; and a major cyber attack on the US.
6. A “bluechip” company collapse. Banks are risky. That’s why there are so many regulations governing them. But have all the regulatory changes introduced since 2008 been sufficient to prevent another Lehman Bros? Perhaps it’s the turn of a related sector, such as insurance, to lead us into the next recession.
7. A ponzi scheme-type scandal. By definition these are illegal but there are plenty of examples throughout history, the most recently. spectacular being the Madoff scandal of 2008, which took the shine off hedge funds for several years. There can never be enough due diligence on an investment decision.
8. Demographics – babyboomers want to be in control. Fund managers need to adapt their value proposition. They started to retire two years ago and within a few years the babyboomers will be requiring a raft of expensive new housing/care and medical facilities. And they won’t be buying many managed funds.
9. Politics. At least there’s a level of stability about the Abbott Government. The big economic question is whether the ideological drive for more and more belt tightening will swamp common sense in the face of another downturn.
10. Something else. Don Stammer, the economist who has entertained superannuation industry conferences for years, calls it the ‘X Factor’. Since 2008 the term ‘Black Swan’ is probably more in vogue. Whatever it is, it’s something which you can’t predict. It’s something else.