Yesterday, in a speech, RBA assistant governor Michele Bullock warned that more businesses would go under resulting in a negative impact on bank balance sheets. She stated that the economic recovery from this recession would be “unpredictable and uneven”.
She further stated, “There will be rising business insolvencies and problems for some households in servicing their debts”.
Post the March covid-19 correction this year, equity markets have rallied to within reach of a full recovery. Significant monetary and fiscal policy support (substantial government stimulus and low interest rates) has supported this recovery and supported higher equity valuations.
However, given the high degree of uncertainty around an economic recovery and earnings expectations, valuations seem rather expensive.
Off course, holding cash at the moment has become difficult given historically low yields. However, it is important to keep in mind that investment is a long-term strategy. Medium-term outlook for global growth and earnings is more uncertain than it has been for decades. Couple this with the impending uncertainty with regards to the US Presidential election outcome and the likelihood of further disruption due to the increasing number of covid-19 cases in the US, Europe, and other parts of the densely populated world, the risks of another equity market correction becomes far more prevalent.
Therefore, it would be prudent to keep some powder dry (hold cash) in light of the current global uncertainty and potential for further corrections and equity market volatility. We are very mindful of the negligible returns on cash, but the focus should be on the opportunity it will bring with regards to enhancing portfolio returns when deployed during a market correction.
We have also remained invested as the strategy has been to have “one foot in each camp” so to speak, so that we benefited from the equity market recovery over the past 5 or so months whilst retaining a larger than usual cash holding to ensure we have the fire power to take the market opportunity when it presents itself.
Now, it is about patiently waiting for the opportunities that will come our way.
I leave you with 2 quotes to ponder over:
“The stock market is a device to transfer money from the impatient to the patient.”
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.”
Elixir Private Wealth Pty Ltd and Aziz Meherali are Corporate Authorised Representative and Authorised Representative respectively of Godfrey Pembroke Limited ABN 23 002 336 254, an Australian Financial Services Licensee, Registered office at 105 –153 Miller St North Sydney NSW 2060 and a member of the National Australia group of companies.
This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax and/or legal advice prior to acting on this information. The material contained in this newsletter is based on information received in good faith from sources within the market, and on our understanding of legislation and Government press releases at the date of publication, which are believed to be reliable and accurate. Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this email.