In retrospect, the last quarter 2018 fall in the US and global markets was perhaps a fall we had to have (like Keating’s “a recession we had to have” because it largely removed the overextended exuberance of US markets then and resulted in the Fed’s decision not to progress with rate rises that could have further derailed a much weaker than it looks US economy.
Janet Yellen, the ex Fed chairman, Charles Evans the Chicago Fed President and Erin Rosengren the Boston Fed President all unanimously believed that a US recession is not on the horizon in the near term. And traditionally, a US presidential election year (2020) is usually not a year for bearish market. Still, this does not change the outlook that I had cautioned for much of 2018 that there are significant underlying risks for the markets that can be triggered at rather short notice. And these risks tend to be overlooked and underrated as the exuberance returns- and perhaps exuberance may return to take the US markets to a new high this year before we face another trigger/catalyst to create another shock. The triggers/catalysts/flashpoints have since subsided and markets can now return to some form of normality with confidence gradually returning. All my caution in 2018 and going forwards however remain valid because we need to recognise that our global economic framework is at ‘razor’s edge’ and we now live in a global environment where we are constantly saddled with a ‘world’s first’ (setting new precedents) (so this can also negate the traditional ‘truth’ that a presidential year is never bad for the stock market).
It is therefore necessary that we remain nimble and place our ears on the ground at all times. David Murray cautioned today “The head of the 2014 Financial Services Inquiry, David Murray, has warned that the economy is becoming more vulnerable to shocks, at the same time as industry super funds lock-up billions of retirement savings in unlisted and hard-to-sell assets. Mr Murray says the lack of monetary and fiscal fire-power has reduced Australia's capacity to react to unforseen shocks while the $2.7 trillion superannuation sector - which was a source of stability in the financial crisis - might turn out to be a risk.” Our financial system has locked us into the mantra of ‘buy and hold’ for posterity, which I had outlined as a risky proposition the entire of 2018. In most cases, superannuants do not even understand what their super are invested in. Nimbleness can avoid significant financial pain that can be inflicted on investors oblivious of redemption risks associated with their investments. Most would still remember that many mortgage fund holders had experienced frozen assets (unable to redeem) during the subprime crisis- when I first read about the subprime, I was quick footed to redeem all my property trust funds I had invested in and saved/avoided a substantial loss that followed as the crisis deepened. The sooner you act, the better you would be.
Notwithstanding a more benign market environment going forwards at least in the near term, I believe this market is one of muddling through, and a market of two halves – a group of companies that perform well and another that don’t, in other words, the modest positive return for 2019 would be unevenly shared. Many companies would face headwinds in growing their revenues and profits – financials, housing, retail, discretionary stocks , so companies with established businesses may be subject to shareholder revolt if profit expectations are not met or more subdued than hoped for. Stock selection is key going forwards with required focus on companies that are less susceptible to the declining business cycle and with a prospective growth catalyst. Key focus should be on the realisation of drivers for growth. For example, fortunes of ‘lottery’ stocks like 4DS and BIT are not dependent on what happens with the declining global economy, their fortunes are dependent on materialisation of their technology/IP for commercialisation, which if successful would be ground breaking. Volpara (VHT) would continue to ride on the growth for a significant need to improve breast screening for women in US and globally, that value proposition is not stymied by a declining economic outlook.
Our domestic inflationary expectations have hit a record low, underscoring an increasing likelihood of RBA cutting rates going forwards, possibly after the Federal election, especially if key economic indicators continue to point lower. In fact, the futures market has already factored in two RBA rate cuts with 78% probability of the second being delivered by December this year. Hence, our ASX market has fared rather well this year on the back of this expectation.
because it largely removed the overextended exuberance of US markets then and resulted in the Fed’s decision not to progress with rate rises that could have further derailed a much weaker than it looks US economy.
