Outlook not necessarily brighter

Forecasts are mixed.

While we can always live in hope, investors need to be aware that the recent sharp rebound in world sharemarkets does not necessarily mean that better times lie ahead.

The most comforting aspect of stronger sharemarkets is the scope provided for investors who are not able to live with volatility or with existing portfolios that are more risky than they can afford to adjust their asset mix appropriately.

Sharemarket trends have, in the past, been viewed as leading indicators of better or worse times ahead. More recently, however, the flood of cash from quantitative easing and low interest rate policies around the world have artificially boosted share prices as investors hunt for yield.

Australian interest rates, even at historically low levels, are still higher than those in other major world economies, as are the dividend yields from many of our major shares. This in large part explains why our sharemarket fell and rose more in line with US markets as foreign investors regained confidence in the US economy.

Contributing to the recent strength of the US market is the widespread confidence that even though US quantitative easing will cease, the Federal Reserve will be reluctant to raise US interest rates quickly. This view follows from the assessment that the world economy is weaker than it appears and that the US will want to limit the appreciation in the US dollar.

Apart from the US, United Kingdom and perhaps China, the other major world economies are struggling, with both Europe and Japan facing the prospect of moving into recession. In Japan, the consumption tax increase has impacted on the economy more than had been expected. This has led to calls to postpone the further increase proposed for next year.

In Europe, the large French and Italian economies have been performing poorly for some time now and without a major change in policy, Germany could move into recession. This is despite the fact that Germany is the biggest winner from the Euro common currency policy. If Germany operated as the UK does, with a separate currency, the Deutschmark would be valued far above the equivalent Euro exchange rate. This is why Germany's current problems are so important to future world growth.

The one significant positive factor helping the world economy is the large fall in the US dollar oil price. This is bad news for Russia, Iran and Venezuela but a great help to Europe, Japan and China. Against this overall macroeconomic picture, it's doubtful whether world sharemarkets are a leading indicator of higher world growth. Time will tell but in the meantime, investors have space to evaluate the appropriateness of their investment asset mix.

 

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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