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Has low investment growth settled in?

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Global investment growth has been sub-par and is likely to remain so for a while yet. The same applies in Australia. This means low inflation, low interest rates, periodic growth scares and potentially a longer economic cycle. For investors, it means ongoing low returns on bank interest and constrained investment returns. But it’s not all bad – if investment growth were stronger we would return to worrying about high inflation and much higher interest rates.

Investment growthSlow and uneven investment growth reflects a whole range of factors:-

While the GFC was seven years ago now, it appears to have had a more lasting effect on confidence

It seems we have been seeing a series of global economic calamities

Rising inequality has been weighing on consumer spending

Slower labour force growth

Weaker growth in emerging countries

The implications are for continuing low interest rates, average returns are likely to be constrained and the economic cycle is likely to be longer then normal. Baring a shock – such as a major geopolitical event – the next major global economic downturn looks like being several years away yet. Which in turn suggests that the cyclical bull market in shares as a way to go before we see stronger investment growth.

When real economic growth is running around low levels and is fragile, periodic growth scares are likely to occur more often as the fear that adverse developments will trigger a return to recession is greater as there is less of a growth buffer. As we have seen since the GFC, these can be triggered by bad weather, military flare ups like in Ukraine, the Middle East, etc. Such growth scares keep investors nervous. So we have seen a sense of ongoing scepticism about the recovery in the global economy and in share markets that has occurred since the GFC. Investors have never quite fully bought the recovery story.

…for the whole article please go to the following link from AMP Capital’s Head of Investment Strategy and Chief Economist, Shane Oliver.

What does low investment growth mean

What stage of the Investment Cycle are we in?

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A major concern for many involved in investing is our location in the investment cycle. There are those who are starting to predict the worst and worry those around them. After doing a bit of research we feel these fears are unfounded. We are six years out from the Global Financial Crisis, since then global shares have increased by 159% while Australian shares are up 91%. All in all things are looking good. Let’s have a look at the cycles and our current position within them.

investment cycleCurrent Market Cycles

Some believe that the current bull market has run its course and we are overdue for the next bear however there is no set rule for the length a bull or bear can run. While the current bull has been running longer than the average it is by no means the longest. Depending on one’s definition of a bear market it could be seen that there was a bear market in America in 2011 which would make the current bull well below average.

Australia and the global market definitely had a bear market in 2011 and so these markets are currently running below average for a bull. With the definition so widely open to interpretation it’s easy to see why some investors are starting to panic. Many, however, feel that the current bull is nowhere near its peak and the threat of a bear market is a distant concern.

The Phases Of A Bull Market Within An Investment Cycle

It is generally agreed that a bull market has 3 phases. Let’s investigate these phases of the investment cycle.

Phase 1: Economic conditions are weak. Investors are lacking confidence. Interest rates are low, as are bond yields. The experienced investor sees a great opportunity.

Phase 2: Economic growth is improving in this part of the investment cycle. Profits are strengthening. All investors are starting to become optimistic.

Phase 3: Investors are beside themselves! With strong profit conditions shares become overvalued. Inflation becomes a problem. The banks react by using their tight monetary policy which pushes bond yields higher. This combination of over-valuation, loaded share investors and tight monetary policy exhausts the bull and starts a new bear market.

It typically takes 3-5 years to complete the bull market phases, but as we mentioned before the market is unpredictable and the bull or bear can last any amount of time. A bull will run until it gets tired!

Is There A Bear In The Woods?

To see if we have a bear creeping up on us we need to look at current market statistics. The current share market valuations are good, shares look expensive but once the earning yields are considered shares are still cheap, as are bond yields.

The global economy is growing well. It does appear to be doing so slower than usual but the slower it goes the longer the recovery period. This slow pace keeps us away from a bear market.

As it currently stands global monetary conditions appear positive and inflation is not yet an issue. Investors are feeling good, but that crazy amount of excitement seems to be a long way off. Australian investors are currently avoiding the share market and are opting for bank deposits.

Put simply the signs of an impeding bear threat are not there. Everything is riding along slowly but surely and the threat of a bear suddenly creeping up does not exist.

Investing Now in the Investment Cycle?

Currently US shares are expensive while most other markets are cheap. If you’re looking at investing at home, Australian shares should do okay, there are better opportunities abroad.

Growl?

In closing, it looks like we won’t be hearing the growl of  bear for quite some time. There is no need to worry about the investment cycle as none of the signs that indicate and impending bear attack are present! Happy Investing!