I’ve been sharing this with my inner-circle… We will have a mid-cycle slow-down around late 2016 and into 2017… Maybe a mild-recession.
How do I know this?
Here’s information that I geek out on.
I don’t normally have a lot to say about shares, but here are some home-truths for the sheep out there.
That’s the thing about booms. They can make chumps feel like geniuses.
And after a bull run in Australia that’s lasted pretty much 22 years without serious interruption, we’re drowning in geniuses.
But that might all be about to change, and I’m not sure that these geniuses will know what’s hit them.
The saying goes that it is possible to make money in any market, and that’s true. But not if you’ve got no idea what you’re doing. If you don’t know what you’re doing, you’re going to get mauled.
And so I think 2016 and 2017 will be no market for sheep – those investors who have no strategy and are just ‘going with the flow’. They buy houses that give them a nice feeling in suburbs they know – regardless of the metrics, and they ‘buy the market’ with equity index funds.
Index funds in particular are about to cop a beating I think.
The story starts with Perth, where the teething pains of our transition to a post-mining boom economy are most keenly felt.
The AFR is covering the sombre funeral procession of economic data:
House prices have fallen and office vacancy rates in Perth CBD are now just under 20 per cent, the highest in the country and the highest in Perth since 1995. Predictions for next year have that vacancy stat reaching at least 24 per cent…
After years of Western Australia having an unemployment rate well below the national average, the state now faces the ignominy of a rate well above it at 6.4 per cent… previously surging migration into WA from other states and New Zealand has reversed direction…
Suddenly, online sites are selling second hand “big boys’ toys” – jet-skis and quad bikes and fast boats – very cheaply. Such bargains are likely to last indefinitely. Economic conditions are expected to get worse before they get better…
Maybe a little harsh, but we’ll see. The mining-led euphoria of 2010 is certainly long gone.
But in WA – and the other resource states of NT and perhaps a little unfairly, QLD, the mining transition is in full effect. In these states, growth has gone from faster-than-China to slower-than-Japan, in the space of a couple of years:
The outlook for the mining state’s labour markets is also sombre, as the large construction workforces continue to give way to much smaller operational workforces over coming years.
So far though, the Australian labour market still rides high in the saddle, with employment holding up, perhaps surprisingly given the pretty mediocre outcomes in GDP.
A lot of that has to do with the public sector, with government-dominated sectors like government, education and health responsible for the lion’s share of employment growth.
That’s not what you want unless you think “transition” involves emptying out the private sector and stacking the books with government jobs – never a sustainable strategy for growth.
However, things in the private sector aren’t all that bad. Confidence has picked up in recent months (the Turnbull turn), and hiring intentions are actually pretty solid.
So all in all, Australia’s got some challenges, but we’ve been through worst. I’m not buying into some of the doomsday scenarios that are out there.
Thing is though, that the Australian future is not reflected in the equities market.
Australia’s listed market has a much larger exposure to financials and materials (which includes miners) than other international markets – and these sectors’ share of market capitalisation are much larger than their share of the domestic economy.
This table compares Australian weights with American weights:
The short of it is that the Australian stock market does not reflect where the Australian economy is right now, or where it’s going.
The mining industry is coming to the end of a super-cycle. All miners are doing it tough right now.
In turn, this is making it harder for the banks, as a falling dollar (related to the terms of trade) puts pressure on their funding costs. This is coming at the same time as government policy is putting pressure on their mortgage books.
Banks and miners have enjoyed the best of times since the GFC. From here though, the base-case is a return to normal profitability, although it could be worse.
Given that reality, market weightings in the ASX200 are out of touch.
As Gerard Minack says, it is “overweight the past and underweight the future.”
And this is the reality of the ASX200. It is backward looking by design. The biggest companies are the ones that did best, yesterday.
And normally ‘buying the market’ – purchasing an index fund, is a safe, vanilla strategy.
But it comes off the rails when your economy is transition – where the superstars of yesterday are not the superstars of tomorrow.
And Australia is in transition.
Buying the market is buying the past, and positions you poorly for the future.
How many mum and dad investors do you think realise this? How many of them are buying blue-chip BHP shares just because they’re ‘blue-chip’?
How many financial advisers are telling them to seek out more ‘current’ portfolios? How many advisers even realise what is going on?
My bet is not many.
This is no time to be a sheep.
This is a time to get active and ahead of the curve. If that means education and skilling up, you’ve just got to take it on.
This transition will throw up many opportunities, but, by definition, the strategies that worked in the past just won’t work in the future.
Time to get ahead of the pack.
If you’ve read this far, good. I mentioned at the start a mid-cycle slow-down. What that means is that the larger cycle, which I expect to top out in 2025-2026 will still be in play.
With that in mind, 2016-2017 will present opportunities for those in the know. If you stay with me over that period of time, you’ll make s#!t load of money.
The mainstream will panic, as per usual, into inaction.
Are you ready for this mid-cycle slow-down (buying opportunity)?
Do you agree that a recession is around the corner?
Do you believe that property prices will be double in 2025 from these already crazy highs?