Market commentary – what to do in a slowing economy

Market commentary – what to do in a slowing economy

ClearView Chief Investment Officer, Justin McLaughlin, hosts a monthly webinar where he gives his views on key economic and market indicators, and how investors may be impacted. You can register for the December webinar here. Below are some key takeaways from the November edition:

Current economic landscape

We are starting to see some weakening in the economy: unemployment ticked up, retail sales figures missed expectations, and business spending dropped. In such a challenging economic environment, it is common for businesses to cut back on advertising in effort to manage costs, which we are beginning to observe.

Other factors that point to a slowing Australian economy are a slow-growing employment sector, flat income growth, and a pullback in building construction.

In light of the above indicators, the best case scenario would be that we avoid a recession and endure softer economic growth for some time. The reason being is that the Reserve Bank of Australia (RBA) and Government have plenty of firepower to prop up the economy. Outside a further RBA rate cut, options include Government spending to stimulate the economy (e.g. infrastructure) and tax cuts. The focus on maintaining a AAA credit rating is not important in the scheme of things. The Government has a huge war chest available to stimulate the economy if it chooses to do so. 

Chasing yield

Investors looking for yield have historically achieved 4% p.a. to 5% p.a. over the medium-term which has been a reasonable expectation. The situation is changing though. A common approach to generating income is through high-yielding shares but crowding into a single sector, like banks, isn’t such a good idea.

Bank shares are unlikely to remain such a high-yield investment going forward. Bank lending is likely to be flat or slightly negative in the next few years and there are no guarantees around bank dividends which could be cut.

Income-seeking investors can still probably achieve returns of around 1.9% p.a. to 2.2% p.a. from credit based funds in the short-to medium-term. Higher returns will typically be accompanied by a lot of risk. 

Alternative approaches

Sensible portfolio construction is key in this environment. A well put together portfolio should deliver reasonable running yield in most diversified models.

An enhanced cash strategy may be an attractive alternative for short-term investors seeking principal stability, higher yields and protection from declining interest rates. This strategy focuses on taking on slightly more credit risk, and in doing so, significantly broadening the universe of investable short-term securities.

The next 12-24 months will be an interesting time for the economy. Aggressive spending will be key. The question is, to what extent will we run down savings?  And that remains to be seen.