Productivity – the great challenge for the 21st Century
The Australian market is suffering lower productivity, which will likely be exacerbated and perpetuated by the lower levels of business investment in line with the lower confidence levels.
Furthermore, the resilience of our employment market during the GFC was attributed to the preference for managers to hold on to good staff, in the belief that the work would return…. It now appears that view might have been too optimistic in some industries… And the short-term impact of such labour market frictions was to maintain excess capacity, impinging on productivity.
The long term return for Australia’s GDP, real wages, and indirectly shareholder profits each requires a swing in productivity figures (which is not aided by the current Federal Government’s IR policies, or other legislative programs).
The New Australian Consumer – and their behaviour
Tax cuts, wage increases, lower interest-rates, and relatively benign inflation help to put dollars in our pockets, but it appears we just won’t spend them like we used to.
This is likely the new normal, but that ‘normal’ will also likely be reversed and forgotten once we are past the ‘lasting impacts’ of the GFC (this could be 10-15 years, but likely far less).
A resurgence in consumer spending (and inverse reduction in savings rates) will help enormously in offering a demand push elevation away from our current ‘stagnant growth’ levels in all states bar WA, ACT, and at times TAS and QLD.
2011 on European Credit Markets – a lesson in volatility
As the above clearly depicts, the Euro Zone has seen a sharp heightening of its borrowing rates, which is caused by an elevation in risk attributed to key players in the European market system (all Countries, bar Germany, and in turn all Bank’s, and many large corporates).
This fear leads to a reduction in transactions, finance, and lending – which can result in the most extreme-case in a second GFC occurring due to frozen credit markets.
At a national level, this higher cost of borrowing is worsening the equation facing many indebted Euro members, as they seek to correct their balance sheets, and are forced to deal with interest costs that are pegged at a level implying failure (this may become a self fulfilling prophecy).
There may still be more downside to come for Euro Credit Issue
The above serves to put the current ‘credit issue’ in perspective.
There is a long way to go before a second GFC occurs on account of ‘frozen’ credit markets.
This can be viewed both positively and negatively (we are a long way from the abyss, or there is a lot further we can fall).
What about fringe issues that may come to the fore in 2012?
The following three charts may or may not impact 2012 – but are certainly open to conjecture and discussion. - Each was sourced from Alan Kohler’s business spectator article, of 30/12/2011.
By some methods of interpretation/analysis, equities are not as cheap as some pronounce.
Has the US housing market found a floor, can growth be restored in 2012/2013/2014, or are the US in store for a further 15 years of pain.
Demographics and Markets
To what extent can demographic back-dated correlations be used/useful?
In this instance, barring serious questions around causation, the trend does bode negatively for equities.
On the question of will the ‘ageing cohort holding shares looking to sell them’ factor be stronger or weaker than in the past – it will likely be weaker, on the back of;
a. Divestments already taken over the last 3-4 years ahead of time
b. With dividend yields being near record levels and interest rates near record lows (and a view that Equities are cheap also), this will likely stop the effect being as pronounced as might otherwise be expected.
Part tactical, part strategic approach to investment allocations in 2012
In our view, VALUATION is the key for 2012 – BUT, post GFC, the science behind this pursuit remains jaded, glassy, and unresolved.
Our view is to focus on what we know, make minimal assumptions, lock-in profits and alpha without explanation religiously, and we always seek to err on the side of defensive assets (instead of growth assets) when there is a marginal or line-ball call. SO when equities do become “exceptionally cheap” that money saved can be put to better use on the ‘rainy day’.
Our main talking points, opportunities and value-adds for the first few months of 2012
- CASHFLOW IS KING
- ALLOCATIONS SHOULD BE REVIEWED
- JUSTIFICATION AND STRATEGY, CATALYSTS AND COMPARISONS necessary for everything held.
- ALTERNATIVE ASSETS – OPPORTUNITY FOR THE NEXT 24 MONTHS
- DEFENSIVE ASSETS - OPPORTUNITY FOR THE NEXT 12 MONTHS
- DON’T BE IN EVERY STOCK/SECTOR
- TAKE SMART, SELECT, STRATEGIC BUT MILDLY CONCENTRATED HIGH CONVICTION INVESTMENTS,
- TIMING IS EVERYTHING – TIME IN THE MARKET IS NEAR DEAD
- TECHNICALS ARE STILL DOMINATING FUNDAMENTALS
- RISK MANAGEMENT IS NOT A NICE TOOL – ITS EVERYTHING
- CURBING YOUR ENTHUSIASM IN THE NEXT ‘BULL RUN’/UPTICK.
Additionally – we have various timing calls and signals for the mid to late part of 2012 we also wish to raise and monitor with you, to further support the allocation/risk benefits attained from implementation of the above, but also to help position and target ‘capturing additional market exposure prior to any bounce off capitulation levels’.
While the risk environment is high, the uncertainty is high, the variability of possible scenarios or outcomes equally high – we are also blessed in the relative state of our economy, businesses, dividends outlook, and balance sheets.
Mixing the positives from the fundamental arguments, along with technical influences, and a focus on empowerment, safety, and ‘buying extreme lows’, collectively should serve to lower the risk, and heighten the return of our clients reading this.
Looking most forward to working with you, through these troubled times we face in 2012 and beyond.
Annexure – What will be the big issues for 2012?
Feel free to provide your thoughts, or discuss this with us.
Below are CBA’s stated issues for 2012, which might help get the ball rolling.
The above text references images, graphs and tables these can all be found in the PDF version available here.