AS YOU all know we’re pretty optimistic about the future when it comes the economy and the outlook for financial markets. But there continue to be group of naysayers preaching doom and gloom and a coming financial apocalypse.
Their concerns are numerous and, on the surface, are pretty serious.
The most common concerns are;
The crash in the Australian housing market which they say is an investment bubble compared with how other property markets are valued overseas.
The impending serious trade war between the US and the rest of the world, but particularly with China, and the dire consequences for global economic growth which, history tells us, comes from protectionism.
The bull run in global equities which is pushing share prices to levels which aren’t being justified by their earnings.
Look, all these arguments carry some element of legitimacy. As we often say, every market follows a cycle with it’s inevitable peaks and troughs. The key is identifying when the cycle turns and, importantly, the severity of the turn. And that’s where we differ from the naysayers … the severity of the downturn.
Yes, the big housing markets of Sydney, Melbourne and Brisbane boomed to an unsustainable level and we’ve been warning of that for the last 18 months. The Sydney market has turned down and looks headed for a 10-20 per cent drop from it’s peak in this cycle. But after a 50 per cent gain over the last 5 years the pull back appears sensible rather than catastrophic.
Yes, a trade war between the world’s biggest economy and its suppliers is unhealthy for everyone but the global economy is in pretty good shape to handle it. Just last week the International Monetary Fund forecast the best global economic growth in 7 years.
As for share prices not being justified, we’re just starting the profit reporting season in Australia and US so we’ll know pretty soon whether earnings are being produced to support share values. Early signs are that corporate Australia is in pretty good shape.
Having said all that, you need to weigh up the threats to your financial well being and assess them based on your risk profile.
If you’re more concerned and conservative than we are then maybe heading for the bunker would ease those concerns. You would simply be trading off potentially higher returns for wealth preservation. That’s not a bad outcome in itself.
So what are some “bunker strategies” to follow?
Reduce Exposure to Equities
The local share market is full of companies exposed to international trouble … banks and miners in particular. They will feel the heat from any global trade war quicker than most so winding down any exposure to these sectors must be a priority.
But it’s more than a prudent financial decision. Logging into a share account, be it super or personal trading, to a screen of red can be a real downer so consider your tolerance to face potential losses and the effect it has on your demeanour. If it impacts those around you then it could be time to unwind now.
If you haven’t already, talk to your financial planner or stockbroker about reducing exposure to risky assets.
Reduce Variable Rate Debt and Sure Up Credit
International banks could stop lending to each other as speculation starts up about who might be holding all the bad debts of defaulting companies and countries because of the effect of a trade war.
This would cause another credit crunch like we saw in 2009 because someone will be sitting on big losses from defaulting bonds and the dominoes will inevitably start to fall.
That means upward pressure on interest rates, regardless of RBA moves, and a very tough lending environment. If things look like they’re heading in this direction, weigh up a fixed-rate loan and take steps to reduce variable rate debt.
Similarly, sure up any credit lines you need for personal or business finances as these will be increasingly hard to secure once lenders start tightening up. If possible try to build up your own ‘credit line’ of emergency savings.
Reduce Offshore Exposure
If things hit the fan the Euro will dive and a tremendous amount of money will flow into safe haven US Dollar, Swiss Franc and Japanese Yen denominated assets. The Aussie dollar will slide against an appreciating Greenback, but we’re increasingly being seen as a safe haven as well.
Assess the financial implications of big currency swings for your portfolio and maybe hedge if you have offshore investments or business interests.
Sell the house and rent
If you live in Sydney, Melbourne or Brisbane and you think the housing crunch will be bigger than expected, sell your house and bank the capital gains you’ve made. Rent until the market starts to turn up and then maybe buy into the bottom.
Otherwise make sure the home loan is under control and be prepared to ride out this downturn in the cycle. A property crunch only really hurts those that have to sell into it. Make sure you’re not in a position of a forced sale because the bank is nervous about your debt levels.
Shift your superannuation investments option
Your superannuation nest egg is invested according to the option you’ve chosen. You do have the ability to change that option to a more conservative investment strategy at anytime.
So check the investment option you’re in now and talk to your adviser if you want a change.
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