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Don’t waste the Downturn

By 06/02/2018December 15th, 2020No Comments

Markets are tumbling, what should I do?

First of all, we need to get some perspective. So, let’s turn down the noise and look what is happening, without emotion.

To appeal to most types of investors, we have divided this White Paper into three parts:

  1. A Dot Point Summary of the issues for those who just want us to get to the point without all the detail;
  2. All the Detail; and
  3. In Conclusion, with a link to Dr Shane Oliver’s Report on the “Correction Time for Shares?” (Dr Oliver is AMP Capital’s Head of Investment Strategy and Chief Economist).

Part 1 – Dot point summary

  • Global markets have been crunched, following US markets down.
  • US markets are overdue a decent correction.
  • In 2017, the world’s major economies grew in unison for the first time in about a decade.
  • The US is still the largest economy in the world and any ramifications will have a ripple effect around the globe, but global growth is still strong.
  • Healthy growth is forecast for the world’s four biggest economies – the US, China, Europe and Japan. The IMF has forecast global growth of 3.9% for 2018.
  • The fundamentals are sound, but it is difficult to “buy” when fear abounds, which is exactly the time that you should be buying.
  • Any short-term market movements are emotional roller coasters that create buying opportunities. Price matters at precisely two times – when you buy and when you sell.
  • At AAG we have an old saying:
    Turnover and sales are vanity, profit is sanity, but cashflow is always king.
    So buy good dividend paying stocks, the gift that just keeps giving.
  • Your long-term investment goals don’t change just because of short-term exaggerated market movements.

So don’t waste the downturn. Roll up your sleeves, put on your flak jacket and let’s get to work!

Part 2 – All the detail

Global market are tumbling following the US, not because of any inherent structural problems.

Following a decent leap in US wage growth last week, bond yields have lifted. In turn, last night’s plunge in the US has triggered a further sell down in global markets, pushing bond yields even higher as the flight to safety continues.

The rise in US wages growth, has fuelled inflationary fears in the US, not the world. And while US wage growth may well be lifting, it’s still coming from a low base.

According to Dr Shane Oliver, the US share market “is long overdue a decent correction. This now appears to be unfolding and may have further to go as higher inflation, a slightly more aggressive Fed and higher bond yields are factored in”.

In 2017, the world’s major economies experienced synchronised growth for the first time since 2007.

Global economic conditions have improved and the outlook for the global economy remains relatively strong. The IMF has revised the global growth forecast for 2018 to 3.9%, up from 3.7% in October. Healthy growth in GDP is forecast for the world’s four biggest economies – the US, China, Europe and Japan. Europe should continue to perform well as it absorbs the slack created during the GFC.

The European Central Bank (ECB) has indicated more confidence in the growth outlook, but is still waiting for “a sustained upward trend” in inflation. So the ECB is likely to remain supportive for Eurozone shares and negative for the Euro for some time to come.

Years of growth downgrades have given way to upgrades as the post-GFC hangover has given finally given way to more self-sustaining growth. Just as the growth downgrades were associated with falling inflation, ongoing monetary easing and falling bond yields, the upgrades are likely to eventually give way to rising inflation, gradual monetary tightening and further increases in bond yields.

Solid global growth should continue to underpin a recovery in corporate profits.

Overall US companies posted higher-than-expected earnings with solid growth and contained costs. Importantly, US companies are enjoying both strong top line (i.e. sales) and bottom line (i.e. earnings) results and earnings expectation for Q1 2018 are also being revised upwards. Internet giants recently surged on strong results as US stocks reached unprecedented heights.

After the US Congress slashed the corporate tax rate from 35% to 21%, another theme that may emerge in the US is “infrastructure spending” with President Trump expected to talk up big spending plans.

The US Federal Reserve (the Fed, who sets interest rates in the US – the equivalent of our RBA) is expected to lift interest rates several times this year. The next one is due next month as they have all but flagged. This is not new news!

Increasing interest rates historically have led to a to a sell-off in bonds, pushing yields up, and a higher currency.

“Overall, we are still not seeing the signs of excess, euphoria and exhaustion that typically come at cyclical economic and share market peaks ahead of recessions and deep bear markets” Oliver says.

Extended bear markets usually occur after extended periods of euphoria, but people you meet in the street have definitely NOT been euphoric.

“Risk off” has invaded markets as volatility (up and down price movements) has surged and emotions run high.

Just because market volatility has escalated, the potential to earn impressive, long-term capital gains and good dividend income (that historically always eclipse returns on term deposits and cash) still remains.

Corrections may provide a wonderful opportunity to purchase more quality shares at a discounted price, as volatility is the friend of the long-term investor.

How long will it last?

We don’t know how far or how long it will take but markets historically always have recovered, and when they do, the crucial buying opportunity will be gone – there will still be opportunities, but just not as good.

Market corrections are just that, corrections, not a time to move to Byron Bay as the world as we know it is ending (although any move to Byron Bay wouldn’t be all bad).

Focus on quality and cashflow, don’t speculate. While the price of a share will certainly fluctuate, the value of a company’s future cash flows is likely to be far less volatile. No matter what asset class you are invested in, price matters at precisely two times – when you buy and when you sell. The return on an investment depends on these prices and the income/cashflow you receive over the investment period.

That is not to say asset price volatility doesn’t matter. For example, self-funded retirees being forced into selling at a temporarily reduced price in order to fund their lifestyle isn’t an attractive proposition. For this reason, we emphasise the importance of maintaining and monitoring cashflow.

In conclusion

Markets are generally driven by fear and greed. To get ahead of the game, you must

  • “buy when nobody else wants to” = fear of the market;
  • “sell when nobody else wants to” = greed will fuel inexplicable buying.

At AAG, our investment philosophy has always been to source quality income paying investments that are sustainable in times of economic or political upheaval. Focusing on income allows an accumulation of funds to invest for your future. Please click on this link to access our White Paper on Investing (dated September 2016):

So don’t waste the downturn, let’s get to work and rise above the headlines! Take a deep breath and remember:

  1. Skilled investors stick to their flight plan – stay the course and stay on target;
  2. Cashflow is king. Look for gifts that keep on giving in the shape of dividend income paying streams;
  3. Don’t waste any downturn – history has shown them to be only temporary;
  4. Opportunities are always there, sometimes they just require a closer look; and
  5. Have realistic market expectations.

Please contact us if you would like to discuss your investment options or if you would like further information or clarification via email at or call us on 08 9227 6300 and ask for the Investments Team.

Finally, as promised, please click on this link to access Dr Shane Oliver’s Report on the “Correction Time for Shares?”:

This White Paper is general in nature only and not intended as advice. All information and views expressed in this White Paper are correct at the time of publishing, 6th February 2018.

AAG AustAsia

AAG AustAsia

AAG is a family-owned group providing Tax planning, management accounting, wealth management, and more. Established in 1979, AAG acts entirely in their clients' best interest by providing financial expertise and upholds a reputation of nurturing long-lasting relationships with clients to assist them with all their personal and business financial issues.