Is it finally safe to buy?
With the Australian market rebounding strongly, some investors could be experiencing a fear of missing out. But an analysis of economic conditions tells me there’s no rush to dive in. With the market looking expensive, so many uncertainties in the world, and a growing list of dilutive capital raisings, is it a good time to sit on your hands?
I previously outlined the risks that had arisen alongside the market’s near-25 percent bounce from its March lows. A multitude of concurrent uncertainties, from the virus itself to the economic and business revenue cataclysm and consequent fiscal and monetary lifelines, a rupturing European Union and a raft of wealth destroying capital raisings, should begin to weigh on the market’s premature enthusiasm.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Max Zan
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Some interesting and divergent comments there – The coming years will prove who is correct.
In a normal market economy, slow growth “generally” prevents Inflation occurring and stagflation is “generally” thought to occur if Government policies disrupt normal market functioning. The Reserve Bank of Australia “currently” has an inflation target of between 2-3% and in December 2019 Treasurer Josh Frydenberg supported that target being maintained, even though some were calling for it be lowered. If the 2-3% target is maintained by the RBA and Government over the coming years, then I find it hard to see how stagflation or even inflation beyond 3% will occur. It will be a foolish government that creates Policies that result in Stagflation and high interest rates when households and businesses are so heavily indebted . It might suit Governments to have Stagflation or high inflation eventuate, but they will be unpopular and it will work against them at the next polls.
Roger Montgomery
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Good points raised Max. Thanks for sharing.
Max Zan
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Hi Roger
Fully agree with your commentary – it all makes sense.
What are your views on Inflation going forward? There appears to be a view emerging by some that Inflation will take off in the next few years. It’s hard to see that occurring with unemployment rising, low oil and energy prices, manufacturing overcapacity, technology displacing workers, low wages, low GDP, distressed Businesses, etc. I’m sure Governments and those Businesses that are heavily indebted wish for Inflation to occur . It’s hard to see it emerging any time soon. What will cause it to occur???
I actually see Deflation being a strong possibility. If it does eventuate, it will be disastrous for anyone with high debt and/or those holding overpriced Assets. It will almost certainly affect everyone in some way – eg Superannuation. Deflation leads to prices of goods and Asset values falling while the Debt levels remain the same. Residential housing is a good example where Deflation is likely to have a big impact. Current Bank outlooks are a good barometer of where things are heading – It’s starting to look ugly.
So why would you Invest today, if down the track Assets are more likely to be cheaper?
Roger Montgomery
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Yes, stagflation is something on the minds of many investors. It could be a story for a couple of years hence. Massive government debt may only be paid off through printing money causing currencies to collapse. That would be the transmission mechanism and it could mean we will be discussing a resetting of the cost of capital one day. With respect to low oil prices, don’t expect them to stay this low forever. And don’t forget, recessions end.
Ricky Leong
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I suspect stagflation is unlikely. There were a number of one-off events which significantly contributed (removal of the gold standard, OPEC oil shock) and which are unlikely to be repeated. Also, that era was characterised by strong unions who could strike and demand wage rises to match inflation (thereby sparking a self-perpetuaring cycle). Finally, there’s much more willingness from politicians to spend money (financed via QE) in order to reduce unemployment.
I think we’re more likely to see a period of high inflation and relatively low unemployment (due to gig economy jobs). However, underemployment will rise and there will be a bifurcation in the middle class between people who benefit from technological change and those who become redundant.
Roger Montgomery
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Thanks Ricky. May indeed prove prescient.