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There are important market forces developing around the world and in Australia that all those participating in the share and bond markets need to understand.
The question everyone is asking, of course, is whether I should quit “everything” or whether it is a time to “buy-in”, at least gradually.
I wish I knew the answer to that question. If I did, I would be a very rich person, but by isolating some of the forces, it is possible to interpret what is happening in the market.
I will start with the US and Europe, where at the beginning of the week, there was a wave of optimism on the basis that they could beat COVID-19 and that the avalanche of printed money being poured into the US would over time, create inflationary forces.
And, of course, as we have seen so often when the American market starts to rise, those who have bet that the market will continue to fall have to cover their shorts and that sparks a computer-driven buying rally.
Morgan Stanley captured the mood in saying that while we are going to see lots of sharp rises and falls, given that Wall Street by the end of Monday had risen more than 20 per cent from its March low, it was unlikely to fall back to that level.
Morgan Stanley says that share markets usually move five months ahead of recessions so the current recovery is in line with that trend, but the bears point out that in the 1930s a bigger fall followed a mid-bear market rally. In this case, a bigger fall is exactly what will happen if the market is wrong about the slowing of US infections.
We are being driven not by normal economics but a virus and that makes any predictions hard to have any confidence in. Morgan Stanley says that in the longer-term we will see inflation emerging, which means that it is risky to be overexposed to cash or long term bonds for an extended period.
In Australia, after the 8 per cent Monday jump on Wall Street, everyone expected at least some of the good times down under. But our share market is dominated by industry superannuation funds and right now a number of them are petrified because the government has allowed people to take out $20,000 from their superannuation fund over the next six months (two instalments of $10,000).
And no one knows just how many people will take up that entitlement. That’s not only freezing the buying of most of our superannuation funds but is causing selling amongst those that are most vulnerable.
And add to that an extra dimension – a number of superannuation funds including Hostplus have valued their non-listed assets above the values set by share markets. If there is a rush to take money out of super in that situation, people will be extracting their money at values that are above the market. That puts a terrible burden on those left in.
What funds should do is value these non-listed assets at market prices, albeit they are depressed at the moment because of the fall in the stock market. But that way funds can be extracted without damaging those that are left in. It may mean that properties and infrastructure in some will need to be sold at low prices.
But of course, nobody knows just what the withdrawal rate will be so it is a little like the virus infection rate.
Those that are holding bank shares have had a bad time on the stock market and, as everyone knows, the bad debt ratios are likely to rise. But events are taking place in the banking market that are bullish for long term investment. In the last few years, big areas of the lending market have been taken up by non-bank lenders. In the tough times, non-banks are now finding it hard to get funds to lend and some are lifting their interest rates.
That is potentially dangerous for the housing market because many investors will have to pay more for their money and may find it harder to roll loans over with some non-banks.
If that is the way it turns out, it will put pressure on domestic housing but banks will regain some of their market share. Banks have been very smart with aligning themselves with the government in all these rescue packages.
Indeed a large number of people with investment loans with banks are getting letters telling them what the bank is able to do in this situation. Very few non-banks are sending out those letters. They are more likely to be saying that interest rates have to rise.
Suddenly, from being some of the worst people in the world in the government's eyes, banks are now in the good books! And some of the nasties that were planned for the banks will be pigeonholed. APRA and its gang have a new target – big superannuation funds.
And by the way, many of my readers have self-managed funds so congratulate yourself. You avoided the retail fund mess and now miss the problems that need to be handled by some of the industry funds. Usually, but not always, self-managed funds have held a worthwhile portion of their portfolio in short term securities for a “rainy day”. They are now wondering just when to buy.
As I said at the start of this piece, I can’t ring the bell at the bottom of the market.
If you are cashed up – pick yourself a time and gradually increase your equity exposure.
Robert Gottliebsen is a financial commentator at Eureka Report. To access more investment insights, from Eureka Report start a free 15-day trial now.