Q&A: economic outlook
MLC Investment Strategist Brian Parker answers your questions on the economic outlook from our December webcast.
View this online discussion and stay tuned to Market Watch for this year’s calendar of events.
The Australian market has fallen 50% from its highs, but has to rebound 100% to reach the previous level. So does that mean it will take 7-9 years or one economic cycle for recovery?
No. There are no certainties about how long it takes to recover from previous share market losses. In fact, if we look at bear markets since the 1970s (i.e. where the market has fallen by 20% or more over at least a two-month period), the recovery period, or how long it has taken to get back to the previous peak, can be as fast as a few months or take several years. Obviously how long it takes to recover from losses depends on what kind of assets the investor is exposed to. A recovery period as long as 7-9 years is rare. It’s also important to remember that selling out of a market after falls such as those we have seen turns paper losses which can be made back, into actual losses, which cannot.
Most market analysts are experienced and knowledgeable. Can you explain why no market analyst, certainly none I received information from, could see the storm clouds on the horizon in October 2007?
A good many did see storm clouds, and not just in October 2007, but indeed much earlier. Identifying storm clouds is one thing, but picking when those clouds are likely to dump on us, for how long, and in what kind of magnitude is considerably more difficult. The kind of tools that economic and market forecasters have at their disposal are not reliable enough to make these kinds of market calls and get them consistently correct.
A good many analysts including our own analysts and fund managers did see particular dangers and were able to avoid them. For example we had almost no sub-prime mortgage exposure, and a much lower weighting to listed property than our peers. However, no investor can ever hope to avoid every risk. Indeed we are not, and can never be in the risk avoidance business. Rather, we are in the risk management business. We need to take and manage risk in order to generate adequate long-term returns for investors.
Is it possible that a whole new financial structure will operate in the world to supersede the share market and where might this leave us?
This is an interesting question, to which the short answer is no. The share market is simply a snapshot of a whole collection of businesses that make a profit by providing the goods and services we need and want. Regardless of what happens on that market on any given day or year, we all need to be fed, clothed, housed, communicated with, entertained, travelled around, banked and insured. As long as we still need those things then companies will still operate, make profits, pay dividends, and re-invest the rest of their earnings back into their businesses. In doing so, the true value of their businesses (as opposed to their market price on any given day) will tend to gradually increase. Over time, the share market simply reflects this growth. Over shorter time periods however, the share prices of the companies listed on that market can be all over the place.
How long do you think it will take before share portfolios bounce back to 2007 levels?
There are no certainties about how long it takes to recover from previous share market losses. In fact, if we look at bear markets since the 1970s, (i.e. where the market has fallen by 20% or more over at least a two-month period), the recovery period, or how long it has taken to get back to the previous peak, can be as fast as a few months or can take several years.
Obviously how long it takes to recover from losses depends on what kind of investments you are exposed to. It’s also important to remember that selling out of a market after falls such as those we have seen turns paper losses which can be made back, into actual losses, which cannot.
With oil prices falling quite dramatically over the last several weeks, are we likely to see further falls or some sort of stabilisation in the price of oil?
Further falls in the oil price cannot be ruled out given just how weak the world economy is going to be for a good part of this year. Long term however, our best guess is that the world price of oil needs to settle at prices that are higher than those we became used to in the 1990s. The world is not running out of oil any time soon, but it will take an oil price above a certain level to ensure that those oil sources that are still plentiful have enough incentive to supply to market. That ‘certain level’ is not $150 per barrel, but nor is it $20 per barrel. Market estimates of that correct long-term level probably range between $45 and $80 per barrel, but it is a very inexact science.
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.
Rate this article
(11 votes, average: 2.91 out of 5)
Loading ...