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April 2019

Is this a good time to invest?

Theodore Roosevelt once famously mused that the more you know about the past, the better prepared you are for the future. Wise words indeed. For investors looking for certainty and clarity it can be useful to take stock of where we have come from and where we are today before we examine what the future may have in store.

Australia has always been affected by the global economy. The 1890s recession had its catalyst in some part due to a fall in global demand for wool. The Great Depression of the 1930s that affected Australia so much stemmed from the Wall Street market collapse of 1929. Fortunately, you are not reading this in such dramatic times. Nonetheless, 2018 was a busy year and our economy was affected by some prevailing global conditions

Globally, 2018 saw a tightening across the board. The US-China trade war kicked off with aplomb, and remains an unknown on the global stage. Brexit continued to eddy along, with no end currently in sight. Where this matter will end is anyone’s guess. Central banks have come to tighten monetary policy as the expansionary policies of quantitative easing unwind. While there were some bright spots, overall global growth was tepid:

While 2018 can be characterised as a busy year by most subjective measures, growth fell in developed and developing nations from the second quarter to the fourth quarter.

Impact locally

Australian GDP was stable in 2018, hovering around the 3% level. Like a duck swimming on a pond however the smooth movement above belied a flurry of activity underneath. Volatility returned to equities, with an equities sell-off across September 2018 which only recovered through January 2019 with recent risk-off (sell-off) behaviour again during February and March. The slowing of global trading partners, combined with the timing issues of new data points indicate that the coming months will be similarly low-growth. This is also likely among our key trading partners.

Although 2019 retains a somewhat flat growth forecast there are signs of positivity into the future. Confidence must be gained in the forecast for the back half of 2019 which demonstrates an upturn in both GDP and inflation.

The biggest show in town

There was no greater show in 2018 than the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, aka the Hayne Royal Commission, or simply ‘The Royal Commission’. The Royal Commission painted dramatic scenes of systemic flaws across various quarters of the industry. Daily, our news reports were filled with videos, transcripts and updates of executives squirming under the rare glare of public scrutiny; it appeared no one had a good day at the hands of Royal Commission inquisitors.

The governance, cultural and regulatory burden of the Royal Commission Final Report focused overwhelmingly on large institutions and banks. Coupled with the ongoing remediation requirements, divestment of wealth businesses, increased capital requirements and an overall recalibration of their corporate identities, the Royal Commission Final Report will be incredibly distracting for banks over the next 3-5 years.

The impact of a tightening on credit will now continue to play out, however this supports our house view of increased market share to non-bank financiers over the coming years. A corollary is an increasing pool of investment grade assets for investors as borrowers look to non-bank alternatives to raise funding.

Home is where the heart is

If the Royal Commission was the biggest show in town, then the property market was the support act. The housing market is just that – a market. As a market, investors (or just home owners!) must accept that it rises and falls, correlates and confounds like any other.

The following chart demonstrates any periods of mild real price falls are always followed by periods of boom.

From the above, we can see Australian real home prices rose 26% across the past 4.5 years. As expected, property prices have now cooled in the key markets of Sydney and Melbourne and led towards a national fall of 9.5% to date as demonstrated in the following chart:

Factors affecting the housing market are numerous. As central banks globally flex their monetary policies, our economy reacts. With lacklustre growth settings expected globally, many economists speculate the next move by the Reserve Bank of Australia will now be downwards which may further support house prices. Conversely, the upcoming federal election in Australia and the well-publicised proposed changes to negative gearing and increasing the capital gains rate (Labor Policy) combined with Franking Credit losses by current opposition may compress prices.

The following chart looks at leading indicators for Australian housing, being residential building approvals and Construction PCI (the changing month-on-month activity levels in the construction industry). Both point to a weakening supply moving forward. Of course, reducing supply of new housing stock with low interest rate settings and low unemployment could also have a strong stabilising effect on prices.

The following chart by the NAB predicts a 2-3 year downturn from 2017-2020. NAB predicts, correctly in our view, that the falls in the Melbourne and Sydney markets will be mostly evident in 2018 and 2019. Looking ahead to 2020, NAB predicts a stabilisation in Melbourne and Sydney and only broadly negative falls nationally of 0.6%.

Overall the figures above relate to broad metropolitan areas which drive the wider market. Further insights into property are gained by analysing local areas, with the following chart demonstrating the largest rises and falls. Excluding outback regions, the largest falls are attributable to suburbs within inner-metro Sydney and Melbourne. Metro areas with already lower values and regional centres have fared well and maintained their values overall.

Finally, property markets are affected by population growth. Australia stands as a fast-growing nation, with its population growing – particularly in metropolitan centres at around 1.6% per annum. Growth is from both natural increase and net migration and this is set to continue. Population growth supports house prices, broadens the national tax base and prompts spending on infrastructure to maintain our liveability. We expect Australia's population to increase 4.5 million over the next ten years, as shown in the following charts:

Additionally, a key proponent of calculating GDP and our economic rate of growth is Government spending on infrastructure. Australia’s infrastructure projects in recent history have come from a low base, to now be an immense pipeline nationally. These projects are supported by low financing rates, strong government balance sheets and a commitment to maintaining economic activity.

With the Major Public Projects pipeline growing from $21 billion in 2012 to $120 billion in a matter of seven years, these combined national infrastructure projects will also maintain employment growth, adding to GDP figures that will further help support house prices.

Key takeaways for investors

Happy investing.
Private Wealth Management - La Trobe Financial

About La Trobe Financial

With A$9 billion of Assets Under Management (AUM), La Trobe Financial is Australia’s premium non-bank specialising in credit and wealth management. La Trobe Financial provide funding and investment solutions to a diverse range of 150,000 customers and have done so since 1952. 80% owned by Blackstone, the world’s largest alternative asset manager, with over US$545 billion of AUM worldwide. We are a proven and trusted investment partner for institutional and retail investors alike, operating Australia largest retail Credit Fund ($4bn AUM and 40,000 retail investors). We have over 66 years’ experience, managing investment mandates in excess of $22.76 billion since commencement.

La Trobe Financial has been a leading innovator in the non-bank sector for many years including, pioneering “Lite Doc®” lending in Australia in 1990, creating the first private Reverse Mortgage (Seniors Loan™) in 2003, launching the first hybrid wealth management-loan product P2C® (Parent-to-Child) to assist first home buyers in 2013, introducing a unique to market Aged Care finance solution in 2015, and being one of the first lenders to introduce a fully digital KYC and AML checking of borrower applicants for brokers in 2017.

La Trobe Financial Services Pty Ltd ACN 006 479 527 Australian Credit Licence 392385. La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence 222213 Australian Credit Licence 222213 is the issuer and manager of the La Trobe Australian Credit Fund ARSN 088 178 321. It is important for you to consider the Product Disclosure Statement for the Credit Fund in deciding whether to invest, or to continue to invest, in the Credit Fund. You can read the PDS on our website, or ask for a copy by phoning us on 13 80 10.

This publication does not constitute financial advice and should not be relied upon as such. It is intended only to provide a summary and a general overview on matters of interest and it is not intended to be comprehensive. You should seek your own financial or other professional advice before acting or relying on any of the content. Copyright 2019 La Trobe Financial Services Pty Ltd ACN 006 479 527. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial.

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