Your market update questions answered
MLC Investment Strategist Brian Parker provides answers to questions the panel didn’t manage to get to during last week’s webcast.
Watch this space for more Q&A from our panellists.
What in the market crisis today is different from the crash of 87?
The fall in share prices then happened much faster, and the recovery began sooner, although the recovery hit a snag quite soon in the form of the early 1990s recession.
The rise in share prices that preceded the 1987 crash was also much less soundly based. Prices had risen pretty much on ‘thin air’ – corporate earnings hadn’t risen anywhere near as fast as company share prices. This time round, the rise in prices was much more closely related to gains in company profits. However, the problem now is that the level of company profits doesn’t look sustainable – profits always tend to fall in even a mild recession, and markets seem to be factoring in just such a fall.
What is the technical definition of a depression?
My definition of a depression is a large and prolonged fall in output, employment, and prices. It tends to last some years rather than a few quarters. It also tends to have an element of self-reinforcement about it. Falling demand/spending leads to falling output and prices; falling prices encourage people to delay spending, which means further falls in output and prices, and so on.
The panel are assuming that the markets will continue upwards in the long run. How sure can you be of this given the rules of money management are likely to be substantially tightened following this crisis?
I think the environment we are going into will be one where investors are much more cautious, much more conservative than they have been over the last five to 10 years. In this kind of environment, investment returns are likely to be more modest than we saw from 2003 to mid-2007. However, this does not mean that markets won’t recover.
At the end of the day, the sharemarket is a snapshot of a collection of businesses. These businesses make profits by meeting customer needs, pay dividends out of that profit, and re-invest the rest back into the business to drive future growth. What this means, is the true value of businesses tends to grow over time. The price of those businesses on the sharemarket will inevitably be much more volatile in the shorter term, but over time, the sharemarket reflects the underlying growth in the value of those businesses.
Which market is dropping faster ― property or shares? Which one is more vulnerable?
It depends on what kind of property you’re referring to. Strictly speaking, shares are falling faster than physical property, but that’s not surprising. The price of shares and other liquid assets are priced every minute of every trading day, and shares have fallen very sharply in price. With direct, physical property however, prices can only be tracked infrequently. You only know how much your house is really worth when you sell it. There are a number of indices of house prices and other direct property values, but because of the nature of the assets those prices do not move quickly. For non-residential assets, investors have to rely on periodic valuations. In contrast, listed property assets are priced every minute of every trading day, and these have fallen very steeply in the past year.
Australian house prices have, in aggregate, been falling ― some areas worse than others. My own view is that house prices have much further to fall, and consequently, I would view them as being more vulnerable at present. In order to determine whether house prices are over or undervalued at any point in time, ask yourself this question. Can the average person, living in the average city, earning the average income, afford to buy the average house in that city? If the answer is ‘no’, then the market is probably overvalued.
97% of my portfolio is invested in an Australian Share Fund. Do you think I should diversify more to foreign markets?
As with any of these things, you need to get personal financial advice. That said, more diversification is almost always better than less, and having all your eggs in just the Australian equity basket isn’t ideal. The local sharemarket makes up only around 3% of the world market, which implies that 97% of the opportunities are somewhere else!
General Advice Warning:These comments contain general information and may constitute general advice. They do not take into account any person’s particular investment objectives, financial situation or individual needs. They should not be relied upon as a substitute for financial or other specialist advice.
Before making any decisions on the basis of these comments, you should firstly consider the appropriateness of its content having regard to your particular investment objectives, financial situation or individual needs and secondly consider the relevant Product Disclosure Document.
Opinions expressed constitute our judgement at the time of issue and are subject to change.
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