Investment markets performed exceptionally well through 2013 with the USA and many European share markets pushing through record highs.
In most of the major developed economies, the threat of a fall back into recession has passed. Output, spending and employment are rising. Inflation and short term interest rates remain near record lows but longer term interest rates in many countries are edging higher on the back of improving global conditions.
Prices are also at record levels for many quality Australian companies. The overall market, however, remains below peaks seen in 2007. Refer to Figure 1. Divergences between the world's different regions and countries seems likely to persist, but with some new twists and turns.
Europe and Japan look set for slow economic growth and in our view are the most at risk of falling back into recession in the near term. In the USA, growth in the next few years could be back to a robust 3-4% pa as solid private sector gains combine with the end of public sector contraction.
The emerging economies, like China, India, Brazil, Turkey and Mexico still seem likely to contribute 70-80% of global growth for the foreseeable future. Their rapidly growing urban middle classes are becoming richer and increasingly driving global consumption patterns. We explore this specific trend in one of our key ideas.
China's growth seems likely to continue at 7-8% per annum while India and Brazil slow down. China's relaxation of the one child policy, bigger roles for the private sector, property rights for farmers and relaxed urban residency rules are all aimed at ensuring a more consistent growth profile for their economy in future. This continues to provide long term support and opportunities for our economy and businesses. Figure 2 shows China as the world's second largest economy by GDP.
In the USA, the feared "fiscal cliff" of early 2013 and continued ructions on the debt ceiling have passed and economic growth has lifted. Despite the lack of a budget since 2011, their Federal Budget deficits have tumbled from 11% in 2009 to a forecast 3% in 2014.
Across most of Europe, budget deficits are also falling resulting in reduced concerns around European countries defaulting.
In contrast, the Japanese Government's spending is alarmingly high and will need to be addressed at some point in the period ahead.
Australia's Federal and many State budget's remain unbalanced and are at risk of expanding further which will lead to cutbacks that are now being planned.
Political leadership is possibly more settled in many countries. New teams are in place in China, Italy and Australia but each seems likely to press for change with a greater private sector focus and pullback in the respective public sectors. This was a trend we noted this time last year. Elections will occur in Brazil, South Africa, India, Indonesia and New Zealand this year.
For Australian based investors, the election of a Liberal National Party Coalition likely means a more business friendly and less frenetic style of Government. Change is already underway and more is planned, including:
- The Carbon Tax is to be replaced by direct action;
- The company tax rate is to be cut to 28.5% but a parental paid leave levy added for bigger companies;
- The Budget deficit is to be cut.
Some of the likely policy changes could include more flexible employment regulation and an acceleration of bilateral trade agreements with countries such as China.
Overall, we see these reforms as a positive for the private sector and overall market confidence but at the same time, businesses must navigate these changes.
There also seems likely to be changes to child and aged care and age pension eligibility. While superannuation changes are promised to be off the agenda for a year or two, our theme of increasing individual responsibility for post work incomes looks increasingly relevant.
With this backdrop, other big issues also at play should be considered.
- Generally, the global population is getting richer and older, having less children, living longer on average and overall striving for more "Western" style lifestyles.
- All around us, technological innovation and commercialisation is accelerating. From the way we consume news and are touched by advertising. To how we communicate with each other and are fed. From how we get paid, to how we buy things and pay our bills. And from how we're diagnosed, to how we're treated. All are changing at a rapid pace.
At one level, these changes and the lingering turmoil of the Global Financial Crisis (GFC) looks likely to keep policy makers conservative and short term interest rates low - and disturbingly for investors, below inflation.
At another level, the accelerating pace of change, with the resulting ongoing creation and destruction of industry sectors and businesses, means more active portfolio oversight and management will be valuable.
Companies whose products and services on which we rely today can be made irrelevant tomorrow.
- Staying a step ahead during constant change
- 1. Focus on your own goals, not the Jones's
- 2. Have a process to guide you allowing you to focus on what matters to you
- 3. The innovators
- 4. Servicing the demographic
- 5. The new political regime
- 6. Urbanisation and the growth of the middle class
- 7. Where to invest offshore?
- 8. Yield does not equal income
- 9. Infrastructure and property – the new annuities
- 10. What to do with the banks?
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