Maher Digby Market Update 2022 – Retirement Investment Planning

Wednesday, June 29, 2022

At Maher Digby we provide an investment market update forum for our clients every year. We focus is on how share markets are performing, a forward view of share market movements, and the choices Fund Managers are making to secure retirement investments, and retirement income for retirees.

Our first guest speaker was Daniel Moore from investors Mutual. Daniel is responsible for managing 25% of IML Australian Share Fund and delivered a very informative presentation aptly titled ‘Rising interest rates change the game’.

Dan started his presentation by delivering a backdrop as to where markets have come from in order to be in the position that they are today. We have been in a falling interest rate environment now pretty much since 1990. In fact, the last time there was an interest rate rise was in 2011, so for the last 11 years we have seen nothing but interest rate falls. This brought the Reserve bank interest rate down to 0.1% which is basically as low as they can go.

We have also seen money pumped into economies in order to overcome the COVID 19 global pandemic. This saw an extraordinary injection of funds find its way into different areas of the market. During the GFC in 2008 the US government essentially printed 2 trillion dollars in order to help resuscitate the economy which was considered a substantial amount of money at the time. During COVID the amount of new money was 8 trillion dollars and this policy had consequences.

We have seen property prices jump to unbelievable levels, valuations of speculative stocks became very high, unprofitable tech stock prices rocketed and crypto currencies went crazy. In the meantime boring old industrial stocks and traditional investments lagged behind as they weren’t sexy enough for this new flood of money. Dan gave examples of stocks they have held in the IML Australian Share fund for some time – the likes of Brambles, Amcor, Orica and Aurizon - all going sideways over this period of time.

Low interest rates, the injection of trillions of dollars and record budget deficits have consequences, the main one being they are all inflationary. Now for the first time in a very long time we are seeing inflation on a global scale. The most common way to combat inflation is to increase interest rates and this is what we are seeing right now. Increasing interest rates has the opposite effect from injecting money into an economy and results in less money circulating. All of a sudden companies and households with debt are spending more money on servicing their loans and less money is left over for discretionary spending. Already we have seen the impact of rising rates decrease property prices by 14% in Auckland, as New Zealand has already increased their cash rate to 2%.  Australia seems to be heading that way increasingly quickly. The unprofitable tech stocks have fallen 60% and the crypto currency market was down 60% at the time of Dan’s presentation and is now down closer to 70% as of today.

Interestingly when these bubbles burst there is a flight to safety whereby money finds its way back to the traditional assets or businesses that actually do make a profit, have real assets and pay dividends. The stocks that have grown since interest rates have increased include Brambles, Amcor, Orica and Aurizon and the Investors Mutual Australian Share fund has done what we expect it to do in our clients’ portfolios. It doesn’t get caught up in the hype when markets are growing rapidly but it does protect capital when markets are falling and this is exactly what we have seen from the fund. They stick by their mantra of investing into companies with a competitive advantage, with recurring earnings, run by strong management that they can buy at a reasonable price.

Our second speaker was Julian McCormack from Platinum Investment Management, whose presentation complimented Dan’s in terms of a very similar theme. Julian’s presentation was titled ‘A Reckoning has Arrived’ and was focussed purposely on the US economy. As Julian said, if the US sneezes we all catch a cold and it is the market that has the most influence on the global economy.

When looking back over the last ten or so years the growth of the US market has been quite sensational and significantly higher than the rest of the world. The question that we must ask ourselves now is, will it continue? because the US market hasn’t always outperformed other countries by such high levels. 

Julian presented a number of graphs illustrating that the US market has valued itself in these recent years at levels comparable to extremes in the past. In fact one of the slides showed that the US market has now only just fallen to the highs that were experienced at the peak of the tech wreck in 2001. There are a number of reasons why the US market has grown as much as it has. Similar to the explanation given by Dan, the low interest rate environment and the level of Quantitative Easing (money printing) has led to this boom. Never before has the US market had such a high level of retail participation – this means individual investors trading stocks on their own. Not only are they trading with their own money but the level of margin lending or borrowed money is also at historically high levels.

With the injection of trillions of dollars, very low unemployment and wages growth, the US consumer has been on a spending spree. This has led to record earnings from US companies and the question must be asked as to whether this is sustainable as some sectors of the market are priced as though this will continue. With the Federal Reserve now sucking money out of the US economy through quantitative tightening measures rather than injecting it, and interest rates also increasing in the US, it appears as though these record earnings will not last.

Despite the doom and gloom that is potentially facing the US market Julian identified a number of opportunities in other markets. These included some traditional industrial nations such as Japan, South Korea, Italy, Germany and China where valuations are nowhere near as extreme. There has not been the same level of money pumped into these economies to create an inflationary environment which should lead to a less volatile investment outcome. 

The overriding message from Julian was that although the US market is the largest, it may not be the place to invest in the immediate future. There are certainly great companies listed in the US however they have been driven up to levels which we have never seen before. Opportunities remain elsewhere and it is a time to be very careful when investing money. The fact that Platinum is currently holding nearly 20% cash in their portfolio and has only 7.5% of their portfolio invested in the US shows that the fund is able to adapt to the way they think about the world. From 1st January to the end of May this year, when the collective share markets of the world have fallen by 11.8%, the Platinum International fund is down by 2.8% in comparison.  

With this phase of change upon us within world economies and investment markets it is highly recommended to be in touch with your Financial Adviser to ensure you are in the best position for your retirement investment plan. For specialist expertise in retirement investment planning contact Maher Digby Securities, on the Sunshine Coast.

For more Information contact Mark Digby at Maher Digby Securities Pty  Ltd - Financial Advisers – AFSL No. 230559. This document was prepared without taking into account any person’s particular objectives, financial situation or needs. It is not guaranteed as accurate or complete and should not be relied upon as such. Maher Digby Securities does not accept any responsibility for the opinions, comments, forward looking statements, and analysis contained in this document, all of which are intended to be of a general nature. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend consulting a financial advisor