One Reason Not to Worry about the Australian Share Market

If you’re scratching around for a reason why the share market just can’t get hot, maybe this is it.

The Sydney Morning Herald says super funds are reducing their exposure to Aussie stocks and looking elsewhere. Think overseas equities, unlisted property, and large infrastructure projects.

It’s not as if they don’t have plenty of money to play with. Apparently, $65 billion in compulsory savings went into super in the 2016 financial year.

But where do you put those savings, exactly? If you accept the current low growth outlook most people seem to go along with, the answer appears to be in the bank. Cash and deposits make up 17% of super assets. That’s above their ‘normal’ level of about 12%.

This caution to the Australian share market seems to be reflected in the wider investment community right now. The Sydney Morning Herald pins it on uncertainty. Considering the future is always uncertain, maybe ‘worry’ is a better word.

Either way, it’s enough to keep money out of the stock market, which is partly why the Aussie market keeps going sideways.

That’s a bummer when it comes to trading the market right now, because there is a severe lack of momentum.

But it should help you sleep a bit better at night. That level of cash means there’s plenty of firepower sitting on the sidelines. This can come into the equity market at some point. Certainly, any drawdown in the share market would most likely bring it out.

Asset allocation in a low interest rate world

Maybe it will be forced to come out anyway — if low interest rates grind on for long enough. That seems to be the mindset in Norway in relation to the country’s massive sovereign wealth fund.

The Financial Times says a review committee in Norway is urging the fund to invest billions more in equities. This is to try and compensate for the dismal returns due from its bond portfolio.

The fund already allocates 60% of its portfolio to shares. The recommendation is to take it to 70%.

One wonders how many other fund managers are thinking the same thing, and are prepared to do something about it soon. Anyone who thinks the bull market in US stocks can’t continue might like to think about that.

Aussie investors might be wondering about their asset allocation too. Global asset management firm Russell Investments says from 2005 to 2015, residential property significantly outperformed domestic shares — especially once you throw in the benefits of negative gearing and 50% leverage.

Those kinds of returns keep drawing investors to the property market. They’re also why first homebuyers keep finding it hard to get in.

Apparently, Treasury Secretary John Fraser is worried that parents are running down their retirement money to help their kids get into the market. That’s also when record high private debt is a threat to Australia’s triple-A credit rating.

One wonders what he can do about it. Last year, the government cracked down property investor loans offered by banks. Some recent results show people simply went elsewhere for such loans.

Take the non-bank Liberty Mortgages, for example, which says its mortgage book ‘soared’ over the past year. Non-banks are not subject to the same controls and regulations as the major banks.

Now, Liberty is a minnow in the monstrous size of the property market.

But the property market will do everything it can to get around any government regulations. And it always happens, because these regulations never address the cause of the problem — they are merely Band-Aid solutions.

If you want to know why that is, go here.


Callum Newman,
Associate Editor, Cycles, Trends and Forecasts

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