Market Update
“What doesn’t kill you makes you stronger” Friedrich Nietzsche
The Westpac Consumer Sentiment Index fell 4.8% in May. While a 4.8% fall is always going to attract attention, we should put this result in perspective. It is still the second highest print for the Index since April 2010 and does follow an 11% rise in the Index over the previous three months. So bottom line things still look reasonably good on the home front.
Westpac states that one in five consumers expect this year’s Federal Budget to improve their finances over the next 12 months. There has only been one more positive response in the eleven years since asking this question – the 2020 survey which showed just over one in four consumers expected to be better off.
A key statistic that markets are keeping a close eye on is unemployment. The RBA has clearly stated that a change to monetary policy will only be considered once labour market conditions tighten and stabilise. It is important to note that the level of employment in Australia is higher than it was before COVID19, and that households are confident in the outlook for the labour market. This is nothing short of a miracle but reflects the resilience of the Australian economy. That said, local conditions are one thing but developments around the world, particularly the US, have an overbearing influence on what happens domestically. We have certainly seen longer dated yield curves around the globe move around based as inflation fears become more of an agenda.
In keeping with our weekly topic discussions, this week we look at the efficient market hypothesis (EMH). The EMH states that the market price for securities (bonds) incorporates all the known information about that security. This means that the security is accurately valued until a future event changes that valuation. Because the future is uncertain, an adherent to EMH is far better off owning a wide swath of securities (bonds) and profiting from the general positive movement in that security. You either believe in it and adhere to passive, broad market investing strategies, or you detest it and focus on picking individual names that you believe are mispriced by the market. We would always advise that investors hold a diversified portfolio of securities to mitigate specific market risk, something we spoke about in one of our previous notes.
The chart below illustrates exactly why we advocate for the use of a diversified fixed income portfolio amongst investors who are typically incredibly overweight equities. As Superman once said, “with great power comes great responsibility” well the same can be said for investments – “with great returns come great risk”. Some risk is good but a greater exposure to interest bearing investments can alleviate some of that risk whilst at the same time provide stable, reliable income.
The bottom line Is that fixed income is still massively underrepresented in almost every retail portfolio. Yet at the same time we have record levels of cash tied up in term deposits earning almost insignificant returns. We acknowledge that with greater return comes a little more risk, but we qualify every investment to make sure it meets not only ours but independent quality control.
We look forward to your company next week!