Over the last 12 months the NASDAQ 100 is up 28%, the S&P 500 is up 23% compared to the ASX 200 up 8%. So why has the market not pulled back? The economy has three main pillars: the consumer, corporates, and the government.
First, most consumers in the US have a fixed loan rate. In Australia we also have a hangover on home mortgages due to the low interest rates during COVID. The increased inflation has less impact then back in the 1970s and 1980s as debt payments are at their lowest in 40 years.
Surprisingly it is the government that is suffering with higher interest rates. They are in a situation where if they cut interest rates, inflation will increase. This leaves the government in a position of ongoing Government deficits as demand for Government funding increases. Government spending is expected to increase as the population continue to age, just look at Japan.
This will affect the Australian Banks. The Australian banks make up 20% of the market index. The issue is the volume of growth of credit for the banks disappear if the net interest margins do not expand then the banks end up with flat revenues. They would need to cut costs and reduce bad debts. The banks rely on volume growth and government spending and without it their outlook is challenging.
Private Equity
Private Equity is becoming a large part of the market. Before investing in a private equity fund you need to understand the risks. Generally, private equity pays a higher return than the regulated and well-established investments like direct shares. The higher the return the higher the risk.
When investing there are core rules to follow to minimise your risks:
- Transparency – you need to understand the investment. You need to understand how your money is being invested, what access you have to your investments, who is making the decision about your investments and the experience and level of education of the adviser.
- Ability to exit the investment if you are concerned about your capital.
- Access to your adviser as and when needed.
Private Equity is a black box investment, to the degree that you have very little control over your investment. Back in the 2000’s a number of what we call black box investments came out. Many of them performed well and a number fell over. One bad investment and you take away the gains of your other investments. Understanding the risk of any investment is critical to long-term investing success.
Market Forecast
The market is currently undergoing a sideways correction since March and is expected to continue to move sideways over the coming five weeks. Valuation continues to look to be at market. With government debt at an all time high we expect the market would pull back on the expectation of government pulling back spending, however, there is no sign of the government slowing spending.
If history is a guide the market will rally before a pull back. At present the market is trading around 7800 points. We expect to see it move above 8000 points in the short term. If the market was to move closer to 8400 points, we would look to hedge positions and take some profits.
As we are coming to the end of the financial year, we will be reviewing client’s capital gains and recommending to book capital losses, when possible, to assist in minimising tax.
If you have any questions, please contact our office.
Grow Your Wealth Pty Ltd
AFSL 403509
51 Thuringowa Drive
Kirwan QLD 4817
Phone: (07) 4771 4577
Email: [email protected]
Jason Fittler: [email protected]
Jane Fittler: [email protected]
