Five years from now the current uncertainty will be history and we’ll be enjoying economic growth.
Over my morning coffee on Saturday I was confronted by the following front-page headlines of two of Australia’s major newspapers:
‘World on the brink’ and ‘Now it’s getting scary’.
Both headlines reflect the editor’s perception of their readers’ concerns for the European sovereign debt crisis and the declining equity market. However, both headlines and the numerous accompanying reports expressed no real insights into the future (uncertainty was clear).
The plethora of expert writers proposed no suggestions or solutions for the economic mess, except for Nouriel Roubini, who appeared on page 62 of one of the papers.
Having read these reports and headlines, my immediate thought was to try to put these headlines into context. They expressed a view that there was no hope, and suggested an imminent impending disaster that I could neither see nor describe.
I could see that people could well be scared by these headlines, but in the cafe it was business as usual and I noted that most of the people weren’t reading the papers!
My initial reaction was to conceive of a genuine disaster headline so that I could put these “real” headlines into a proper context. So I designed the following and tried to imagine the scene as if there was a real disaster coming.
‘The world readies for imminent destruction as massive meteors are just a week away from impact. There is no hope’.
The SMH reported that all trading on the world’s equity markets ceased yesterday after the dramatic market declines of recent weeks. NASA made a final declaration of the impending unavoidable collision. All world banks were closed as people prepared themselves for the inevitable. “There was no point in trading or investing” said Australia’s Treasurer, a recent and now the last recipient of EuroMoney’s Best Finance Minister Award. “There is no future and people should stay at home with family to focus on that which is important to all of us as humans”. Finally, the editor and staff wish everyone peace in these final days.
Now that’s a headline! It is clear and unambiguous. It puts the future into context. There is clearly no solution to that impending disaster. Suddenly and importantly, the real value of investments is defined by the observation that there is no future. Suddenly even cash has no value and there is no price for gold!
Coming back to the present, we can immediately see that there is a future. The short-term future is unclear, but the further out in time we look, the future actually becomes clearer. Thus, while there may be a recession in Europe or the US in the next six months, Greece may default and some more banks collapse, it is clear that the world will achieve economic growth over the next five years.
It seems clear that China in five years will be substantially larger than it is today.
Indeed, China could grow at half its current growth rate and still be 20% bigger in five years. Australia’s population will have grown by more than one million in five years, and the economy will be supported by China’s growth. When you look to the next 10 years, all the above forecasts of growth are likely to be compounded. Yes, the longer-term economic growth outlook is certain. That is why we invest and our aim is to capture this growth. What is even clearer is the cause of the current market decline. The world is undertaking a massive restructure of its economic and social framework. Excessive debt is now seen as an unsustainable stimulant to economic growth. It brought forward consumption, it created excesses, degraded moral behaviour, stimulated greed and actually destabilised long-term economic growth. In some respects the GFC of 2008 was the “economic collapse we had to have”.
The future is also now clear. Debt is going to be repaid. Consumption slowed and speculation curtailed.
Importantly the perceived value of all investment assets will be reassessed. Some assets will be worth more and many less. Those assets that rely on debt or speculation will fall in perceived value. A rationale and conservative assessment of sustainable returns will result.
As an investor with capital with a longer term focus, the market will present to you an abundant of growth opportunities.
For many months now we have been advising clients and managing their capital on the basis of:
- There is no hurry to invest. Markets will generally be weaker over the short term. We have maintained relatively high cash levels to be ready when market opportunities present themselves and sentiment is irrationally negative;
- We suggested there is no logical basis for index investing. We are not buying markets but we are purchasing parts of businesses on your behalf. Stock selection and a focus on yield are vitally important. Companies that can produce high levels of profitability and convert current profit into future growth are our targets.
- We were hopeful that our selected stocks would be offered at attractive prices due to market volatility. We intended and have used the market volatility to acquire targeted stocks at prices below our assessment of value. We will continue to buy slowly and average down wherever possible.
- We have a rational assessment of the world’s economic problems and we have put them into context in assessing investment risk. We do see solutions and have no doubt that decisions will be made by those in power to alleviate the situation.
In recent weeks we have stepped up our buying activities on the behalf of our clients.
Right now it is our investment team’s belief that the Australian sharemarket is approximately 15% undervalued as a whole. Individual stocks are being presented at greater or lower discounts and we are building portfolios along these lines.
In our view, the market will remain at these discounted levels for at least the next six months. We will use this weakness to improve the cost base of client portfolios as we can see that the world, in particular, China and Australia, will grow over the next five to 10 years.
The medium-term future is certain and starkly different to the weekend headlines.