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Newsletter 7

14 Dec 2018

Merry Christmas and Happy New Year - Reflection 2018 and Beyond

We are well into December and our thoughts are on having happy and safe holidays over the Christmas and New Year break. 

It is also a time to reflect on 2018, which of course may include considering our wealth creation and management strategies. Recently, volatility in financial markets has returned for a whole host of reasons from US/China trade battles, BREXIT, US sanctions on Iran and Russia, US interest rates, etc.

The yield curve has inverted again which historically is an indicator of a recession in 12-18 months’ time, while many market analysts are wondering how corporations will increase earnings in the next 12 months.  Of course those that have read Ray Dalio, in which he speaks frequently on the convergence of  “debt” cycles (which run for 75 years plus) with “business” cycles (which are for 7-10 years) and given the level of leverage of central banks and the US Budget deficit being $1trillion dollars, there is good reason to think about a recession in 2020 or beyond.

Against this back drop is that the four largest economies in the world, US, China, India and Eurozone continue to grow with low levels of inflation (except India) and unemployment (US) particularly in the technology areas of robotics and AI. The costs of production continue to fall and with technologies such as 3D printing will mean that manufacturing in the future will become local again, as transportation costs will make offshoring uncompetitive. Half the world is now on the internet and it is expected that in another 10 years that 95% will be, so global growth will continue.  It is important to remember that in the last 30 years India and China’s middle class has each grown to 300-400 million of their respective populations of 1.3billion and 1.4billion. With similar trends occurring in Indonesia, Nigeria, Brazil, etc. it should see the global demand for energy, goods and services increase.

The key point I wish to make is that economic times are always uncertain and historically that has always been the case. The difference is the rate of change has increased and this is exciting; however for many it is disconcerting.  

Strategies for minimising the effects of a major crisis include increasing exposure to bonds and holding more cash. Another is to dollar averaging down on existing investments so as to reduce your cost base. Another benefit of this strategy is that historically yields on equities remain constant even in periods of economic downtimes. A further consideration may be to diversify and invest in themes, e.g. battery, infrastructure, bio tech, robotics and AI with an eye for the future.

I remind you our investment strategy is that investing in Australia is all about yield (income) as the growth will come from international markets overlayed with theme based investing.  Consistent with our objective of achieving income and growth it is pleasing to report that the one of our key US products – ETFS High Yield Low Volatility ETF (ZYUS) since the market correction has outperformed, (i.e. not fallen as much) the S&P 500 index by 7.6% since 28 September 2018.

If you have any questions please feel free to reach out.  

Our office will be closed from 21 December to 7 January 2019.

We wish you a wonderful Christmas and safe and fun New Year!

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