FS360 Episode 21 - The strength of the Share Market

Joining Chris Mulcahy and Gavin Nash on the FS360 Podcast, is Director of Financial Planning at Mulcahy & Co Thayne Turley.

Thayne says November was the best performing month for the Share Market since 1987, for the Australian Security Exchange (ASX). 

The value sector was the best performing, which is sustainable businesses that don’t rely on economic growth to be expanding or economies to be expanding to be benefiting. Traditionally these are the banks and Woolworths etc.

Most equity and property markets across the world were, broadly speaking, up by 10 to 15 percent. Most people’s investment and superannuation accounts are looking healthy.

The expectation is to have lower interest rates for a longer period of time. However, Thayne says inflation and these interest rates rising again in the future is something we need to be mindful of.

Thayne explained that thanks to government assistance, the chance for economic growth in the future is looking strong.

“In a nutshell you’ve had governments … provide a lot of money … the money available is probably around 20 percent greater than what it previously was. If you look at household savings rates’ they’re well and truly up,” he said.

“There’s been some supply shocks in the system too like manufacturing plants have been shut down or had to slow down, so it does bode well for economic growth going forward.”

Household savings rates are up because of the government stimulus packages and the fact that people haven’t been able to travel anywhere and spend money due to COVID.

Chris says governments want to provide confidence in people through these stimuluses so that they are out spending money again. Thayne mentioned clients have questions about Australia’s debt levels and borrowing, but our debt levels are good, they are heading back towards surplus.

Thanks to the COVID vaccine in the United Kingdom, there is a lot more confidence in the Share Market moving forward. Pharmaceutical companies were expecting a 50 percent effectiveness rate in terms of success when issuing the vaccine and the timelines on a release were uncertain.

However, when they were above 90 percent effectiveness and being released earlier, investors could see the upwards trajectory going forward and the fact that COVID may not be prevalent as long as first expected. This led to airline stocks and flight centre stocks etc. increasing by 40, 50 and 60 percent.

Thayne says lots of the online stocks such as Amazon, Google, Microsoft, Zero, Tesla have grown considerably over the COVID period which is what’s helped the Nasdaq outperform.

“Those share markets are higher than where they were in March earlier this year. They’re the ones that have done all the heavy lifting because they’re the ones that make up the highest percentage of the indexes,” he said.

International stocks are higher than where they were in February 2020. Australian equities are a little bit lower than where they were in March and cash and fixed interest allocations haven’t gone anywhere in terms of capital difference, they’re negligible. Overall if you look at equity returns to date for the last 12 months, it’s only the Australian equities that are down and if you look at that, your banks are the ones that are actually in the worst position as opposed to all the other stocks.

Looking ahead for the next 12-months, Thayne says working with his research team for investments, from a risk and reward perspective they look at emerging markets, Australian shares and property, in that order, as the better sectors to be investing in. These are the reasons that dividend yields are high so you will have the opportunity for growth.

Uncertainty with shares arises in the black swan events, like COVID, that sends the world into shock again. Thayne says investments in low variable interest rates is where you would prefer to be.

“Compare those likely rates and return to cash and fixed interest which are very minimal and then the expectation that there’s the possibility of inflation so that’s when you see interest rates rise,” he said.

“So, if you’re invested in fixed rated bonds and inflation is happening, you could see a deterioration in capital so you don’t really want too much money to be invested in there.”

“You would like to be exposed to variable interest rates, but once again still low, so it’s more about that capital preservation, so that’s the way we’re seeing the world … in that your hypothetical opportunities for return are really going to be from the equities.”

“If the inflation scenario happens then businesses are better positioned to deal with that because they can subsequently increase their price of goods … to counteract inflation. So, broadly speaking, equity is better than cash and fixed interest.”

Thayne says the biggest worry going forward is inflation rates. There’s been lots of capital provided around the world, up to 20 percent more cash flow than there was previously and then you’ve had some manufacturing shocks where people can’t get their hands on goods.

That’s been expected to be the main driver of interest rates increasing going forward. However, with the essential banks and Reserve Bank ensuring that interest rates will remain low for the next three years, outside of inflation you wouldn’t see that that would be the need.

For any more information or assistance with the Share Market an any other financial planning needs, contact Thayne and the rest of the team at Mulcahy & Co Financial Planning at one of our 5 nationwide offices (Ballarat, Geelong, Ararat, Mildura and the Sunshine Coast).

Article by Ollie Nash

From Episode 21 of the FS360 Podcast by Mulcahy & Co