Often finance writers comment that the investment world has changed since the Global Financial Crisis sent stock markets around the world tumbling in 2008 and 2009. Maybe that is true or maybe it’s just that investors stopped paying attention to the risks and focused too much on the possible profits? In any case, it’s time to think about what might happen in the next 5 years or so and contemplate making some changes to my Australian stock market investment strategy.
At this point please let me stress that nothing on this site or my ramblings are intended to act as any form of investment advice. I am not drinking cocktails on a private yacht in some sunny tropical location while millions of dollars pour into my bank account, so please don’t think for a second that I am suggesting a share market investment strategy that investors should follow.
Let’s quickly review what has happened over the last decade. Back in the years proceeding the financial crisis many major developed nations borrowed vast sums of money and this made everyone feel warm and fuzzy because the GDP numbers looked good.
Politicians and most economists like getting excited about any type of economic growth but don’t seem to worry if it can be sustained over the long term or not. So for years it was spend, spend, spend and wondrous new ways were found to make money out of thin air via “financial engineering”.
I have lamented about the obsession with GDP before and in late 2009 I wrote:
“The focus on GDP leads us into an economic trap because once most people are convinced that GDP growth is good, that is what governments will strive to give us. Quality of life issues, diversifying the economy and a whole host of other factors we should be taking into account in terms of managing the economy don’t get much attention.”
“My view is that Australia has wasted a golden opportunity to position our economy for the decades ahead. I believe the majority of the stimulus money that has been pumped into the economy has not been well spent, I see few clearly defined outcomes and reckon the Australian economy has a cold which could easily become something a lot more nasty.”
Anyway enough about GDP, I will now get back on topic.
When the GFC hit the first villain was debt and the way it was diced and sliced not to look like debt. The politicians blamed the bankers and the economics held up Keynesian economics as the way to save the global economy.
So the G-20 leaders came up with a cunning plan to spend, spend, spend (with many nations having to go further into debt to spend) and this apparently was going to fix things. Well it didn’t and we are now past blaming the bankers and the politicians are now in the firing line.
One of the few shining economic lights is China and in this case we are supposed to trust the GDP numbers and believe that a command economy is doing a good job of allocating resources. That seems a little too good to be true to me.
In Australia the high dollar is smothering the manufacturing and tourism sectors, the number of foreign students coming to Australia appears to be on the way down so our GDP numbers are being propped up largely by housing, government spending and of course commodities. (hard and soft)
Of course we are doing our best to smother these sectors as well via the mining tax and bans on the export of live cattle & sheep for example.
So putting all the above together I see the following risks:
- The Chinese economy will slow considerably and prices for iron ore and coal will come off their current record highs.
- The Australian economy will enter a period of recession.
- The U.S. economy will struggle for years and is already in it’s version of a “Lost Decade”.
- The debt mess in the Eurozone will take years to sort out at best.
- Global economic growth will be subdued for the next 2 years at least.
Therefore I think it’s prudent to review my long term Australian stock market investment strategy taking the following into account:
- The commodities boom has been a hoot but it’s time to take some money off the table. (I actually have been doing this for much of 2011)
- The Australian domestic economy is hardly going to be the place to have a lot of exposure over the next year or so. If there good companies that pay a healthy dividend and their stocks are available at a bargain price then I might be interested, otherwise I will give those sorts of stocks a wide berth.
- The Australian manufacturing and tourism sectors are in big trouble and it will take years to turn them around if it fact they can be. So I don’t feel inclined to buy stocks in those areas.
- Australian companies that have good revenue coming in from Asia or emerging nations or the potential to grow revenue in these markets are worth having a good look at.
What all this means for me is that cash is indeed king and that I am not inclined to move money out of cash at the moment and probably not for a few years unless these is some dramatic turn around in the global economy.
If there is a change of government in Australia then I would expect stocks to rally 10% or more but during that rally would be a good time to take any profits, rather than convince me to leap back into the stock market in a big way.
Overall I feel I have become less of a long term investor and am now more focused on the short-medium term. Whether or not that is a good change to make to my investment strategy only time will tell.
Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp