Strategic Investment Outlook 2010.
Part 1) the Investment Environment
Following on from the Strategic Investment Outlook for 2008, I am presenting a strategic framework to structure my investments in 2010 and beyond. This outlook is much more difficult to judge and my confidence in being correct is much lower. Australian asset prices (both residential property and listed shares) have appreciated rapidly over the last 18 months, so the margin of safety in 2010 is significantly less than late 2008/early 2009.
Essentially the key question that I am trying to answer is:
Are we still in the continuation of a secular bull market? This is more from a global position than an Australia specific viewpoint. In my opinion a global outlook is imperative for the long term allocation of investment resources in Australia as Australia is a global follower it does not project sufficient power to be an engine of global growth. Sub, shorter term cycles, can exist in Australia that can result in a ‘timing difference’ between the performance of Australian investments and global investments, but this is not possible over the longer term. In simple terms Australia ‘still rides the sheep’s back’.
There are cycles within cycles but long run bull markets can persist for a number of years. I would argue that the current secular Bull Run has been in existence from 1983.
Secular bull markets are the key to a buy and hold strategy. Secular bull markets also enable debt to be a facilitator of return enhancement.
To see just how important a secular bull market is to long term returns (and how devastating high leverage can be in a secular bear market) view the following:
http://www.amateur-investor.net/Secular_Bear_Markets_vs_Secular Bull_Markets.htm
The above link is for the share market, but the underlying logic applies equally to the property market.
The most dangerous time for investors is when they misinterpret a cyclical bull market for the continuation of a secular bull market.
The catalysts that enabled the continuance of the current secular Bull Run have changed over time, but there were several key catalysts that enabled the market to continue to evolve but in a continuous medium term upwards movement. I believe that the underlying key catalysts were:
*long term decline in interest rates over 30 years
*structural jump in international trade (but one that is unbalanced)
* Structural advancement in the use of financial instruments.
* the enhanced realisation on the part of central banks that they could apply the Bernanke put during times of economic and financial duress.
* The proliferance of neo-classical economics and efficient market doctrine into political decision making.
These key catalysts have been operating in a mutually co-operative manner to re-enforce the secular Bull Run. But the major negative side effect has been the increase in asymmetric global financial risk.
The key question is can the current secular bull market that has been in existence since 1983 continue:
In my opinion there are a number of structural impediments that increase the risk that the current secular bull market is coming to an end. The following link highlights them very well:
http://pragcap.com/why-this-isnt-a-new-secular-bull-market-pt-2
Again this is focussed on the share market rather than the property market. But I don’t believe that over longer periods of time the two investment classes can diverge from one another. In the short term yes, but not over the longer term as they both rely on similar inputs. (I am not talking about degrees of relative performance, but rather a divergence, i.e. on a long term basis a positive/negative relationship).
My conclusion is I DON’T KNOW. But I think that structural investment risk is currently very high.
Part II to follow.
Part 1) the Investment Environment
Following on from the Strategic Investment Outlook for 2008, I am presenting a strategic framework to structure my investments in 2010 and beyond. This outlook is much more difficult to judge and my confidence in being correct is much lower. Australian asset prices (both residential property and listed shares) have appreciated rapidly over the last 18 months, so the margin of safety in 2010 is significantly less than late 2008/early 2009.
Essentially the key question that I am trying to answer is:
Are we still in the continuation of a secular bull market? This is more from a global position than an Australia specific viewpoint. In my opinion a global outlook is imperative for the long term allocation of investment resources in Australia as Australia is a global follower it does not project sufficient power to be an engine of global growth. Sub, shorter term cycles, can exist in Australia that can result in a ‘timing difference’ between the performance of Australian investments and global investments, but this is not possible over the longer term. In simple terms Australia ‘still rides the sheep’s back’.
There are cycles within cycles but long run bull markets can persist for a number of years. I would argue that the current secular Bull Run has been in existence from 1983.
Secular bull markets are the key to a buy and hold strategy. Secular bull markets also enable debt to be a facilitator of return enhancement.
To see just how important a secular bull market is to long term returns (and how devastating high leverage can be in a secular bear market) view the following:
http://www.amateur-investor.net/Secular_Bear_Markets_vs_Secular Bull_Markets.htm
The above link is for the share market, but the underlying logic applies equally to the property market.
The most dangerous time for investors is when they misinterpret a cyclical bull market for the continuation of a secular bull market.
The catalysts that enabled the continuance of the current secular Bull Run have changed over time, but there were several key catalysts that enabled the market to continue to evolve but in a continuous medium term upwards movement. I believe that the underlying key catalysts were:
*long term decline in interest rates over 30 years
*structural jump in international trade (but one that is unbalanced)
* Structural advancement in the use of financial instruments.
* the enhanced realisation on the part of central banks that they could apply the Bernanke put during times of economic and financial duress.
* The proliferance of neo-classical economics and efficient market doctrine into political decision making.
These key catalysts have been operating in a mutually co-operative manner to re-enforce the secular Bull Run. But the major negative side effect has been the increase in asymmetric global financial risk.
The key question is can the current secular bull market that has been in existence since 1983 continue:
In my opinion there are a number of structural impediments that increase the risk that the current secular bull market is coming to an end. The following link highlights them very well:
http://pragcap.com/why-this-isnt-a-new-secular-bull-market-pt-2
Again this is focussed on the share market rather than the property market. But I don’t believe that over longer periods of time the two investment classes can diverge from one another. In the short term yes, but not over the longer term as they both rely on similar inputs. (I am not talking about degrees of relative performance, but rather a divergence, i.e. on a long term basis a positive/negative relationship).
My conclusion is I DON’T KNOW. But I think that structural investment risk is currently very high.
Part II to follow.