Just because a problem is obvious it doesn't mean it's going to be solved.
Hedge Clippings would love to claim the above adage as our own and would also be more than happy to credit the author if only we could recall in which of the thousands of emails we receive each week we found it. In any event it struck a chord based on the chorus of negative possibilities and opinions that are currently doing the rounds.
It is worth noting that based on what we are seeing, reading and hearing we are more in the glass "half empty" than "half full" camp, and in one conversation with a "half full" (metaphorically speaking) investor over the past week we pondered which, if any, of the following scenarios might be more positive in 6 or 12 months' time than they are now.
Australian Property/Equities:
Problem: Negative influences coming from oversupply (units) and reduced demand (particularly from Chinese buyers), potential reductions in immigration, tightening credit from banks following the Hayne Royal Commission, low wages growth, higher mortgage costs as fixed deals turn to variable, higher US interest rates impacting bank's cost of funds, and reduction in negative gearing if there's a (likely) change in government next year.
Solution/Outlook: Glass half full, and a reminder not to listen to property experts who as recently as April this year couldn't, or wouldn't, see the writing on the wall.
Australian Economy:
Problem: The Australian economy is the envy of the world - growth forecast around 3%, low interest rates, low unemployment, but also a hostage to global, and particularly China's, fortunes. See above - if the property market weakens further it will impact significantly on consumer sentiment, spending, and thus unemployment. Any slowdown and the RBA has nowhere to move.
Solution/Outlook: Glass half full. And then there's the federal election.
US Economy/Equities:
Problem: Rising interest rates, stretched valuations, The Donald, and after the recent mid-term elections no longer fully in control, potential expiry of tax and infrastructure short term "sugar pill", trade policy, Chinese tariff war.
Solution/Outlook: Glass half full. Anyone able to predict "double down" Donald please let us know.
US/China Tariff War:
Problem: As above - who's going to blink first, Donald or Xi? There's a good chance that if it gets worse before it's resolved, Donald might have scored an own goal.
Solution/Outlook: Could go either way. If solved expect a bounce, but could get worse before it gets better.
Chinese Economy:
Problem: As above - the tariff war is likely to hurt China more than the US, it's slowing, although still a significant force. There's more than just the tariff issue at play, including mountains of debt.
Solution/Outlook: The government is doing everything it can - and they can do more than most to solve problems as they don't have to face elections - but they can't control everything.
Brexit/Europe:
Problem: The UK's previously dominant position as a (the) global financial centre is irreversibly damaged, and with it a significant section of the economy is relocating to the EU.
Solution/Outlook: Whatever the outcome, no one's going to be happy! Definitely half full, and a reminder that David Cameron must have had a brain snap when he announced the Brexit referendum!
In Summary:
In case you're wondering if we're alone in these thoughts, last night we listened to Dr John Hewson give his economic outlook at EY's Annual Hedge Fund Symposium. Being a self-confessed economist, he was able to quote reams of facts and figures which yours truly couldn't memorise at the time, or if he could, couldn't a couple of glasses of chardonnay later. However, it's fair to say he was definitely in the glass half empty camp.
For what it's worth, while happy to identify the problems, the good Doctor wasn't forthcoming on how to solve any of them either. How times have changed since he left politics!
