If this is the new normal in a low return world ... give me more!

Ashley.

Yes, all very true but---------with the Dow where it is one of two things will be needed to bring it back to about "normal". Either earnings must jump exponentially or pe,s must reduce. The ASX is not historically hot, about fair value, but who cares when the Dow decides to downgrade?

Interesting discussion.

Longonly.

to longonly -
i agree that Australian shares are still well below their 2007 highs. But that only matters to people who bought at the 2007 highs. Unfortunately many did and if they are still holding on they will be waiting many more years to get back to square one - and that's before inflation.
All Ords at 6853 in October 2007 is 8450 in today's terms after inflation. It may be many a long year before the All Ords gets back to 8450. In the past the All Ords has taken more than 30 years to recover in real terms after past crashes (eg 1968 to 2004).
I also agree that the US market is horribly over-priced on a whole range of metrics - but it has been over-priced been since 2010 but it has returned 100% since then.
The problem is that markets generally don't crash BECAUSE they are expensive (eg on PER measures). Most of the time they don't even crash WHEN they are expensive. (eg at the top of the market the Australian market P/E ratio was only 15 - hardly expensive. But the Australian market crashed worse than almost every other market in the world - and we didn't even have recession or a sub-prime problem.
Of the 20 biggest stock market crashes in Australia, only 2 of them were when the market was expensive at the time (1987 being the stand-out example). The causes of the crash are almost always external forces that infect the local market whether it is expensive here or not (1951-2 was the main exception).
cheers
ashley

hi phil,
on meeting el-Erian - met him at a PIMCO sales pitch in Sydney on the grand world tour to sell the 'new new normal' catch-phase. What amazed me was the idea that if you thought economic growth would be 'lower for longer' why on earth would you sell treasuries? I still don't get it. Anyway i June 2011 I under-weighted Australian and global shares in portfolios in and over-weighted bonds. What happened next? Greece 2 + the US downgrade crisis hit - shares sold off everywhere and bond prices soared as yields plummeted. Amazing that even when the cause of the problem was US debt, people still rushed into buy more debt as a 'safe haven'.
Then at the end of 2012 - the start of the great QE boom - I shifted the over-weight in bonds back into shares and listed property - and rode the QE boom all the way into this year.

Also, in case readers get the wrong idea - the fact that we have had an unprecedented 5 year run of positive returns from every asset class is not a suggestion that it will continue. Of course it won't. Never has in the past, and never should.

cheers
ashley

Your numbers may well be correct for the last few years, but it is worth remembering that only 2 sectors of the ASX are trading above their previous GFC numbers------health care and consumer staples. The Dow is about 17/18% above its long term market average. The Dow pe is about 21, long term average about 15. Dunno about you experts, but to me it looks dangerous.

Longonly.

There is another point worthy of consideration and illustrated by the following question;

Which return is better, 5% or 10% (after tax & fees)?

It depends!!!

If 5% is generated in a 3% inflation environment, then it is better than 10% in a 10% inflation environment.

Real after tax and fees returns relate to our investment's purchasing power.


Peter

hi peter V,
yes real returns are what matters to living standards. The past 5 years have also seen unusually low inflation. Even cash has return positive real returns (in 40% of all years in Australia, cash has suffered negative real returns - and that's before tax).
So the past 5 years have been unusually good in real terms as well.
For historical stats I generally always use real returns.
cheers

ashley

And what happened just after the past best run of 1925 to 1928? Everybody probably thought how wonderful the returns were before the Great Depression. I fear we are headed into a major financial calamity unlike we have ever seen before. Trump's desire to slash US tax rates and spend up big will push the US into never seen levels of debt on top of dubious financial engineering like quantitative easing and record low interest rates that has really not achieved what was intended. Most governments are still piling debt on top of debt that cannot really serviced now, let alone in the future - Australia included. Voters are angry and likely to elect even more inept politicians who cannot hope to deliver what they promise except to fuel more voter anger.

Ashley,

Perhaps what they meant was that a world of low returns was required for the global economic and political environment to remain normal, not that low returns were inevitably hurtling our way?

I would suggest that the list of calamities you put forward is not indicative of a well-functioning global economic or political system. These events in isolation have not impeded the ascent of equity and bond markets to date (due to significant monetary accommodation, as well as other factors), but the trend is decidedly negative in my view.

Will investors be able to muster enough courage to continue bidding risk assets higher if this trend in global relations continues?

"I met El-Erian in May 2011 and questioned him about the ill-timed decision" - and what was his response?

Ashley,

The real question looking forwards is "where to invest in 2017 and beyond ?". Nothing looks to be compelling value right now and several commentators have raised the following points in some form or another; a viewpoint that I share.

1. The Australian equity market index has returned well below its long term average over the last two years, and being dominated by banks and major resource companies is an issue. Both are having their profits squeezed (esp. miners from lower commodity prices) and this looks set to continue.

2. International equities (hedged and unhedged) produced a poor return last year because the AUD was not as weak as expected because of QE policies across Europe, China, Japan and the US. Recent US economic indicators suggest reasonable conditions for US corporations but (in my opinion) the index looks to be at record highs. Europe is still in the doldrums.

3. Australian bonds have performed well over the last few years but there are bubbles appearing in the bond markets. Central Bank policies and the likelihood of currency wars will mean returns will be poor.

4. Australian cash yields are at record lows but Australian retail investors will benefit if banks continue to chase depositors. The recent hike in one year term deposit rates to 3% presents a good return for savers, but remains well below long term averages.

5. Listed property (local and offshore unhedged), have seen spectacular returns over the last two years but well above what is regarded as sustainable. The returns are still recouping the disasters of the GFC, but listed property can currently trade at anything up to 20% above the value transacted on direct property markets. Listed property has been a major beneficiary of the chase for yield.

With all this going on, there's not really anywhere that screams "value" to me right now.

My 2-3% on cash and term deposits does not feel especially good.