• Wesfarmers shows the risk of acquisition-based growth read here

ABC Nightlife radio featuring David Buckland


ABC Nightlife radio featuring David Buckland

Australia is often described as ‘The Lucky Country’ – we have natural resources, good weather and distance from problems elsewhere in the world. Financially we were relatively untouched by the global financial crises – it might seem we are in good stead but you never know what the future holds. David Buckland joined Philip Clark on ABC Nightlife and here is a summary of some of his points:


  1. Academics Elroy Dimson, Paul Marsh and Mike Staunton from the London Business School have collated data on the return from various asset classes since 1900. In the past 116 years, the returns from the share market in many Developed Countries have averaged around 10 per cent per annum in terms of capital growth and assuming reinvestment of dividends.  Over the same period, inflation has typically averaged 3-3.5% per annum.
  2. The issue with equities is that while they are the best returning asset class (Property has been closer to 7% p.a. while Bonds have, on average, delivered no more than inflation) they also have the most volatility, or delivered the biggest swings.
  3. In any year, the average of 10% might produce an annual return in the range of positive 30% or negative 10% (plus or minus 20%, 90% of the time). On average, we get a negative year about every four years, and typically every 7-8 years we have a bear market, as defined by a decline of at least 20 per cent.
  4. We know some of those declines can be real knee-tremblers such as:
  • Five downturns in the first 25 years of the 20th Century with declines of 25-30%,
  • the Great Depression when the US market declined by 85% in the early 1930s,
  • the 1974-75 oil shock saw the US market decline 45%,
  • in the 1987 crash it was down 30% (down 50% in Australia),
  • the 2001 tech wreck saw a 45% decline; and
  • the 2008 Global Financial Crisis it was down 50%.
  • Average of these 5 more serious bear markets (B. – F. above) = 50% decline.
  1. And how the composition of markets has changed over this 116 year period?

USA in 1900: 15%, UK + Germany + France = 40%, ROEurope = 20%

USA in 2016: 53%, UK + Germany + France = 12%, Japan 8%

1900: Railways – 60%, Textiles, Iron, Coal, Steel important.

2016: Technology, Healthcare, Banks, Oil and Gas, Retail, Insurance, Telecommunications

Some industries have declined; some have moved to lower cost locations; some have transformed (telegraphy into telecommunications/ smartphones).

Change/ disruption never sleeps!


  1. Taking an average 10 Year Bond Yields (the rate of interest which Governments pay when they are in Budget Deficit – given they mostly receive less than they earn) across Germany, Japan, the US, Australia and the UK, interest rates have declined from 14% to around 1% over the past 35 years.

Comment: a wonderful “tailwind” for the revaluation of all asset classes, which cannot be repeated.  Don’t fool genius investing for the interest rate tailwind!

  1. US corporate profit margins (a cyclical series going back to 1950) has jumped from multi decade lows to all-time highs over the past 15 years.

Comment: There is an inverse relationship between “labours’ take” and “profit margins” – and there is no doubt “labour” is under pressure from globalization, automation, digitization etc.  Will “labour” be able to fight back, or will governments be forced into wealth redistribution?

Comment:  Academics Saez and Piketty claim that over the past 35 years the share of US wealth from the top 0.1% of the country has jumped from 8% to 22% (nearly 3X); the share of US wealth from the top 1% of the country has jumped from 22% to 40% (nearly 2X); whilst the share of the bottom 90% has declined from 35% to 25%.

Interestingly, China’s top 1% has, over the past 35 years, jumped from a 6% share of Income to a 25% share.  The very rich are getting relatively much richer!

  1. After running at around 0.5% p.a. in the 200 years up until World War One, global population growth accelerated and peaked at over 2.0% p.a. in 1975, and is now running at 1.0% p.a., and is forecast to hit 0.6% p.a. by 2050, and is then expected to decelerate further thereafter.

Comment: There are some countries like Japan (128m to 98m, down 23%, in the 40 years to 2050), Italy and Germany that will experience negative population growth, whilst some countries, mostly in the relatively poorer parts of the world will see their populations explode.  Immigration is a big issue.

  1. Debt levels have exploded over recent decades.

Comment: Consumption has been brought forward.  Global non-financial sector debt to GDP is up from 150% to 225% since the tech wreck of 2001.  Debt in some countries is growing 3X faster than their underlying economy.  If there are any shocks via higher unemployment, higher interest rates, falling asset prices, then those households/ companies / governments with too much debt/ poor cash-flow will be in trouble.   (Witness Portugal, Italy, Ireland, Greece and Spain in 2008-2009).


  1. The Global and Domestic share-markets have done well over recent years despite the fact aggregate earnings haven’t grown (in total). Most asset classes are expensive based on traditional valuations, and this is largely a function of ultra-low interest rates where those lucky enough to have cash and strong cash-flow have been moving out of very low interest paying accounts.  People will worry day to day / month to month about Trump, Putin, Le Pen, Syria, North Korea but factors like earnings expectations, inflationary expectations, interest rates and confidence are the big drivers to market valuations over the long-term.
  2. China’s Debt to GDP ratio is expected to jump from 250% to 300% over the next three years, and we wonder if the World’s second largest economy and Australia’s largest trading nation (one-third of our exports go to China; 15% to Japan and 7% to Korea) will have a stumble. It certainly looked that way in early 2016 before China had a credit-induced boom, which was topped off with some Trumpmania post the US election in November 2016!
  3. Much of Australian residential property, at 9-12X median income, is priced at around double the median income relative to similar sized cities in the UK, Canada and the US. The Government’s willful blindness to foreign buying has assisted this bubble in pockets. Due to regulatory changes, Australia’s Banks have gone from one-third of their credit outstanding into housing 25 years ago to two-thirds of their credit outstanding today.  Just because Australia hasn’t had a recession for 25 years, don’t get complacent.  Economic cycles are alive and well.
  4. The Superannuation Pool in Australia is forecast to grow from A$2 trillion to $7 trillion over the next 20 years, about double the pace of the Australian economy; and a higher portion of this pool will need to go offshore, chasing the world class technology, healthcare, oil and gas and other opportunities.

Chief Executive Officer of Montgomery Investment Management, David has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

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.


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