Low returns globally, growth in China, the "failure" of quantitative easing, Donald Trump and the transition of Australia's economy: these are the top five issues you'll be facing as an investor in the coming years.
In the October '16 Netwealth webinar, UBS' head of investment strategy for Australia and New Zealand, Tracey McNaughton, noted that 2016 has been a "challenging year". It is, after all, the year that saw two major geopolitical events occur that almost no one anticipated - not the markets, not the political commentators and certainly not the relevant politicians themselves. What is important to remember, aside from learning to expect the unexpected, is that events like these will have long-term impacts on global markets.
According to McNaughton, we're now in a world where growth in emerging economies is rapidly outpacing developed markets. Inflation is low across the board, except in high-risk markets like Russia, Brazil and South Africa. Interest rates and bond yields have fallen, in some cases well below the zero line, and investors have been capitalising on this because bond prices are inversely proportional to yields.
All of this means that investors are now in an unusual environment where risk no longer directly correlates with return.
This ties into the next issue McNaughton highlighted: China. While she said UBS was generally "relaxed" on China at the moment due to the government's strong fiscal stimulus, there remained the looming problem of the Chinese housing market. House prices have risen massively, and 40% of household wealth in China is held in residential real estate. Should China's potential housing bubble burst, this could have significant ramifications on the global economy.
The last time the housing market saw a correction in a major global market was during the Global Financial Crisis (GFC). Which brings us to third issue McNaughton mentioned: the gradual failure of quantitative easing. She noted that since 2008, there have been 670 interest rate cuts around the world - or, one every three working days.
These cuts were designed to stimulate local economies, but it hasn't stopped growth stalling in developed markets across the board. One of the main reasons for this, McNaughton said, is that developed markets are also usually ageing ones, which means there are fewer people in the workforce, and this usually translates to lower growth.
Lower economic growth and fewer employment opportunities also played a significant part of the narrative behind the election of Donald Trump as President of the United States. Economies have been reliant on monetary policy since the GFC, and this has put upward pressure on asset prices, meaning lower-income workers have had an increasingly difficult time purchasing those assets (housing in particular).
McNaughton said, "Not everybody owns equities and not everybody owns houses, and so as a result of those 670 interest rate cuts, there’s been large proportions of electorates right around the world who have been left behind."
Trump's campaign, she added, reflected similar populist movements erupting around the world, which she argued "hampers the ability for governments to govern".
Australia isn't immune to this type of movement. Due to voters' increasing preference for third parties and independents, we're now in a position where minority governments are becoming the norm. This makes it more challenging than ever for the elected government to get proposed legislation passed in parliament, which can obstruct economic reform. This isn't just because governments are trying and failing to pass reforms; it's also because, as McNaughton said, "Politicians are making policy just for the next election and not for the longer term. This is unfortunate, because we’re right at the time where we need governments to step up and support the central banks, and this unfortunately is at a time when they have limited capacity to do so."
Having said that, McNaughton said UBS was "fairly optimistic" on Australia given its 25 years of uninterrupted economic growth, even through the GFC. While Australia's earnings growth has fallen due to the collapse in commodity prices, this trend appears to be gradually reversing.
Summing up her macro analysis, McNaughton said investors should be looking at equities opportunities in emerging markets and the Eurozone and bonds in Australia. In terms of currencies, she recommended looking to the euro, the US dollar and the Japanese yen.
If you have any questions for the team at Netwealth, email or call us on 1800 888 223.
You can view the entire webinar presentation by Tracey McNaughton.