FYI | Jul 15 2015
By Peter Switzer, Switzer Super Report
With uncertainty being thrown at us from Brussels to Athens to Beijing and the Shanghai stock market, to those eternal pessimists called economists to the worst of all — journalists desperate for a negative story to get a page one headline — it's high time I reminded you of what a professional long-term investor has to remember.
The unholy alliance of economists and journalists is scaring you with the prediction of a low-growth environment. Since 2008 they've warned about a Great Depression, years of low returns from stocks, the failure of Quantitative Easing, the US taking a decade to recover, years of high unemployment and so on.
Needless negativity
Since March 9, 2009, for want of a starting date, if you stuck with stocks, the S&P/ASX 200 is up 73% plus six years of dividends, let's say 27%, so you are up 100%. And if you took our advice three years ago to go long dividend stocks, you are up a whole lot more. So much for needless negativity.
I think low growth will happen in some economies but others will do better. The post-GFC world is different and we did avoid a worldwide depression, but many countries, unlike us, suffered a great recession, and it takes time to repair balance sheets — corporate, national and personal — and this will hold back the kind of growth we saw when the world had unbridled optimism.
Slow growth delivers low inflation, low interest rates and slowly growing company profits, and so share price gains are restrained, but they still rise.
At least two years ago I told you how I agreed with Macquarie Bank's Tanya Branwhite, who was of head of Australian Macro Research and who now is at the Future Fund. She said the numbers all point to a slow grind higher for growth and while stocks will head up, it will be slow.
Of course Tanya looked way out when stocks rocked earlier this year going from 5,161 on December 17 into a Santa Claus rally that rolled into a New Year surge to top out at 5,982 on April 27. That was 16% in four months!
But then that old "sell in May and go away, come back on St. Ledger's Day" advice worked out right for this year. Of course, those who made this little ditty up never knew about the debt dodging dramatics of the Greeks and the crazy China casino called the Shanghai Composite. But there were equivalents in the 19th century when that maxim was created.
Since April 27 our index has gone from 5,982 to 5,492 where we finished on Friday, and we are in the hands of the Greeks and the EU leaders on whether we go up or down from here.
The Chinese authorities have virtually said: "No more speculation, for you," and as long as the economy does OK, then the stock market will be ignored, as a casino should be.
The chart below shows Tanya was right about the stock market and we all know that our economic growth has stalled in the 2% band when we need to be in the 3% band to bring unemployment down, company profits up and ultimately to push share prices higher.
The issues
Graphically the chart shows how we have moved sideways, and over two years we have moved up, albeit at a slow pace. And I think this will continue until we have a number of crucial major economic issues sorted.
Here they are:
• The Greek debt impasse is sorted out;
• The green shoots of better European economic growth get greener and stronger, which will be affected by the Greek challenge ;
• China proves, despite its crazy stock market, that it still can grow around 6-7%;
• The US economic recovery is so certain that the Fed is happy to raise interest rates;
• The greenback starts to rise more and our dollar slips more, though I am happy with the currency now around 74 US cents plus; and
• Other issues, such as Japan's economic recovery being more certain, are also important.
Of course, I am describing a world economy getting back to normal and, until we get there, slow growth will prevail but that's not to say that we have to cope with market crashes. This could and should be a slow grind higher as Tanya predicted because the usual killers of growth and stock markets — inflation and rising interest rates — look a few years off at this stage.
Just like our economy, which seems to be grinding higher, despite the best efforts of economists trying to get noticed and journalists chasing the ‘doomsayers', rather than the more optimistic number crunchers.
The essential tools for investors
So, provided nothing of a black swan nature comes along, long-term investors need to remember:
• They don't have to impress shareholders or unit holders quarterly or even annually. Some people bought BHP at $25 on the basis that it might be $35 in a few years time, which would be a 40% gain. If you throw in the dividends of say 16%, that would be 56% over three years and an 18% plus per annum return. If it was four years, we're talking 15% plus! Get my thinking? Even if it took eight years, that would be 9% return, which will clobber term deposits and annuities.
• Buying quality companies on the dips has been a rewarding investment strategy.
• Europe remains the number one preference for the smarties of the investment world and provided the Greek negotiations and aftermath can be contained, then this slow grind higher should persist.
• Stock markets have a good history of passing their old all-time highs unless they have been in a bubble, as in the case of Japan and the Nasdaq Composite. Our all-time high on the S&P/ASX 200 index was 6,828.70 reached in November of 2007, and what followed was the GFC.
On my reckoning we have 25% to go and I am prepared to back history being right, so long as I remain cautiously positive about US economic growth and the rest of the world getting gradually better. And while I'm waiting, I am pocketing good dividends, which are miles better than term deposits and I hope you are too.
My job is to assess the curve balls out there and to work out whether they are hittable, and at the moment I think they are. The ones tossed from China and Greece are tricky but I reckon they are playable, especially for an old dip-buyer like me.
However, if they start to look unplayable, you will be the first to know — remember that!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual's objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
