Hedge Clippings | Friday 21 June, 2019
 

It's difficult preaching the gospel of risk aversion at a time when markets, both in Australia and the US, are at record levels and, given the outlook for interest rates, likely to head higher still. However the fact is that equity markets are being driven by those very interest rate cuts which are signalling that all is not well with the economy, both locally and, despite whatever the Donald might say or tweet, in the US.

As the governor of the RBA points out, there's only so much that monetary policy can do to stimulate the economy, and there's the risk that come the day - and it will come - that the policy cycle turns from easing to tightening, there will be plenty of pain for both individuals and those businesses that have loaded up on super cheap credit.

However, as we've noted above, the "careful of what you wish for" message is not easy to get across - akin to trying to sell umbrellas in the bush during a drought. There may be some bumps ahead for some companies come reporting season, as investors and fund managers react - or possibly overreact - to negative surprises, particularly at current stretched valuations.

One additional relentless driver of the market has been the popularity of index and ETF's. And while the market continues to rise it's easy to see why these products are so easy to sell; the market's on the up with little sign of interest rates changing direction to spoil the party, so jump aboard and relax as you're only paying a few bps in fees. As the market rises so inflows increase, with little to no care taken of stock selection. If it's in the index, the good will be bought along with the bad.

However, when the tide turns the opposite will occur, and falling markets will result in ETF redemptions and sell orders, putting further downward pressure on the market and triggering further sell orders... and so on.

While there's a place for ETF's and index investing, there's also a place for active fund managers, albeit sorting the good ones from the bad is neither easy or simple. But then as Kerry Packer once reportedly advised "if it was easy son, everyone could do it."