Posted on 29/10/2019
“Master of puppets I’m pulling your strings
Twisting your minds and smashing your dreams”
Metallica, Master of Puppets
September Quarter 2019 Review
The limits of extreme monetary policy approached new depths over September with central banks lower for longer forever pushing more supposedly safe haven bond markets into negative rates. Negative cash rates, negative-yielding government bonds and even absurdly-negative rates on corporate bonds has subverted the financial system and savings market towards unusual times. There’s no doubt that we are witnessing the limits of this extreme policy with the recent Westpac-Melbourne Institute Consumer Sentiment Index indicating confidence is being impacted by rates being too low.
The textbook monetary economists must be thinking: how can this be? Well, out in the street, retirees, younger generations saving for a home and those working for a living are all watching their savings erode, house prices rising above achievable levels while their credit card interest stays double digit and their wage rises are subdued. To be fair, it’s the only stimulus game in town with most governments around the world (including Australia) failing to take advantage of low government bond rates to spend and essentially invest into their local economies. It’s definitely time for the baton of policy to pass on to governments and their fiscal policies. The “master of puppets” central bankers are painfully aware of their limitations.
Markets have responded predictably to the lower-for-longer rate outlook with returns higher over the quarter across all asset classes. Our outlook remains the same. Returns are at risk of being lower and more volatile over the next 7-10 years. Other headwinds remain, trade talks splutter between good and bad, our key export destination China continues to moderate and then there’s geopolitics like Hong Kong protests and the ever-present, erratic Trump.
The 3-5 year returns continue to exceed expectations across most of the investment options. The table below shows Statewide’s Superannuation option returns ending 30 September 2019 over 1 year, 3 years, 5 years and since inception.
|Super Returns to 30 September 2019*||1 Year||3 Years||5 Years||Since inception|
*Selected Statewide Super Pre-Retirement Member Investment Options.
The default MySuper option continues to perform well and ranks 6 out of 46 funds over 5 years ending September 2019 according to the SuperRatings MySuper survey.
Global and Australian Economy
The direction of the Australian and indeed global economy appears to be one of weaker moderate economic growth but at this moment, no widespread recession. Globally the trade wars are affecting the business environment and we are in the midst of a manufacturing recession. Luckily the services sector and the American consumer are doing their bit to keep the economy moving but some sort of peace across the trade war rhetoric between US and China should help the global economy.
The other source of policy support remains government stimulus. Globally, governments of most nations are in the fortunate position to borrow at very low rates to spend, tax less and fix long term infrastructure. Across most nations, governments are not doing enough. Take Australia as a case in point. The Australian federal government can borrow over 5 or 10 years at the incredible low rates of 0.75% and 1.06% respectively (as at mid-October). Conversely, would you lend to the government at 1.06% per annum over 10 years? I guess not! At these measly rates, the government of the day can fix energy, water, update infrastructure, address the issues on National Broadband Network, invest in health and education, update Work Start and even help retirees. Furthermore there’s corporate tax, incentives on research and development helping to expand our exports. In other words there’s a lot to do yet we are stuck with a surplus mindset. In a word – MADNESS.
The chart below shows the global interest rate on offer by aggregating the main economies. The rivers of Babylon are indeed flowing again with low interest rates! Rates are at 5,000-year lows!
Source: Bank of England
Public vs Private Markets
Lately we’re starting to see a pushback by the public markets and the listing of private companies. Basically, the public markets are our stock exchanges. You list companies on exchanges like the Australian Stock Exchange, or say in the US, subject to local listing rules and the shares are freely traded everyday on these markets.
What types of shares are listing (termed an initial public offering or IPO)? Traditionally companies listed to gain access to capital in order to invest/grow their businesses. Lately it’s been used as an escape route for private equity managers to list their investments as a way to get paid. In other words it’s a remuneration strategy for private equity managers to “monetise” their valuations.
The following chart shows the percentage of IPOs with negative earnings. Are we surprised that these so called unicorns like Uber are struggling under the scrutiny of public markets with tens of billions in valuations yet negative underlying profits? Similar to the negative-yielding government bonds, companies listed on the stock market are forgiving of the occasional loss making company but will punish over time a serial unsustainable business model worth “billions” according to the private equity of venture capital managers.
At Statewide Super, we bias our investments with investment managers who prefer stocks exhibiting sustainable business models with reasonable valuations or stocks experiencing temporary difficulties but offering compelling value. That approach has underperformed the market over the past 5-10 years but the September month is hopefully a marker for a turnaround in that style of investing. Over the long term, a value/valuation approach towards investing may offer superior returns for investors’ patient enough to absorb the shorter-to-medium-term market gyrations.
The times are indeed strange with negative cash, negative-yielding bonds and even highly-valued, loss-making companies dominating the headlines.
Our approach is to seek sustainable long term profits by investing in positive-yielding bonds, companies with sustainable business models and moreover diversification across asset classes and businesses.