▲ALEX JOINER ECONOMY
ALEX JOINER
CHIEF ECONOMIST AT IFM
INVESTORSWHERE I WOULD
INVEST $10kI
t has become difficult to find rays of economic
sunshine as the outlook for the global and
Australian economies becomes somewhat
clouded. We have seen a material slowdown in
global economic growth since the start of 2018
and this has also occurred in Australia.
The backdrop to this has been a marked rise in
geopolitical uncertainties. Chief among these are
the trade tensions between China and the US (and
indeed the US and Europe), political uncertainty
in Europe and the ongoing drama that is Brexit.
Nonetheless, the most positive real-time economic
“indicator” seems to be equity markets (at least at
the time of writing) – a somewhat counterintuitive
conclusion given economic uncertainty. This is
less an economic indicator and more a positive
reflection of how some investors are viewing
the outlook in a positive light. I say this because,
despite some increased volatility, both Australian
and US markets are at or near historical highs.
However, interestingly and by sharp contrast,
bond yields have fallen markedly and this suggests
some investors disagree with this assessment.
Such diametrically opposing views are rare – so
why is this the case and who is right?
This apparent dislocation between investors'
opinions stems from how they view central bank
action. Bond markets clearly believe there are
downside risks to economies where growth rates
are at “trend” and in the absence of any material
inflationary pressures. Most central banks agree
and have “doubled down” on their cautious tone,
and/or are looking to ease policy. However, equity
markets have taken this as a sign that policy makers
are being pre-emptive and there are upside risks to
growth. An economist's view might be somewhere
in the middle: this additional stimulus is more
positive for asset prices than for the real economy.
Should monetary policy be successful, and in
the absence of external shocks from trade ten-
sions, etc, there may indeed be some upside risks
to growth. Some of the most positive indicators
globally that have weathered the recent slowdown
in real GDP growth are those in the labour market.
Unemployment in particular has been very lowin many advanced nations: in the US it has been
as low as 3.6% (a record) recently; in the UK it’s
3.8% (the lowest since 1974); Japan has 2.4% (the
lowest since 1994); and Germany has 3.2% (the
lowest rate since before reunification). This is a
positive as it supports growth, living standards
and, importantly, wages growth. The latter is
particularly important if we are to experience
a sustainable upswing in global economies.
Unfortunately, Australia is the outlier here with
an unemployment rate at just over 5%. But this
comes with some marked labour market success.
Indeed, Australia’s employment growth has actually
been better than the economies mentioned aboveand it’s a great positive that more Australians have
jobs now than ever before.
But we have been a victim of our own success
to some extent and strong population growth
and a record proportion of people wanting a job
have meant the unemployment rate has remained
stubbornly high. Consequently, we haven’t seen
as much of an acceleration in wages growth and
inflation as we would have liked. This is why the
Reserve Bank has eased monetary policy further,
in an effort to push unemployment lower still.
The federal government has also sought to
assist with household tax cuts and could do more
on infrastructure spending and productivity-
enhancing reforms to boost growth. Should these
mea su res be successf u l, t hen we shou ld see some
more positive i nd icators i n t he Aust ra l ia n contex t
soon enough.As an economist you have a lot
of information and therefore a
lot to worry about. Personally
I’m a risk-averse and long-term
investor so I’d invest a $10,000
windfall into my super.
In the first instance, for many
people this can be more tax
effective than investing from
net income.
Second, it is professionally
managed so someone else does
the worrying while working to
maximise returns at an accept-
able level of risk (that the inves-
tor can decide on).
Third, and most importantly,
it provides access to a much
broader range of asset classes
that are otherwise difficult and
expensive for a retail investor
to access. This includes tradi-
tional financial markets outside
Australia where a retail investor
has less visibility, as well as a
diverse range of foreign and
domestic “alternative” asset
classes. This includes what are
called illiquid assets such as
commercial property and infra-
structure, which can generate
more stable returns that are
less correlated to traditional
financial market performance.
In this portfolio approach,
an investor is less exposed to
a single country, asset class or
indeed a stock, with diversifica-
tion likely providing a more sta-
ble return than might otherwise
be the case over the long term.
What Australian and global
economic indicators have
positive outlooks?
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