Investment update 9 April 2018

Last week in the markets

Over the past week Australian shares were up 0.5% while small company shares were down 0.5%. Shares in developed countries fell 0.7% with the US market down 1.4%. Shares in emerging markets were down 0.8%. The Australian dollar increased 0.1% to 76.84 US cents. The Australian 10 year bond yield increased to 2.66% while the US 10 year bond yield increased to 2.77%. The oil price fell 4.4% to 62.06 US dollars per barrel.

Feelings and facts - investing through the sentiment cycle

It seems more than ever that markets fluctuate in response to media shocks and investor sentiment. Brexit, trade wars, actual wars, banking royal commissions and Donald Trump’s Twitter storm can give the feeling markets are on the edge.

In turbulent times it’s important to draw the distinction between short term market volatility, largely driven by sentiment and the news cycle, and the longer-term rationality that reflects the ‘fundamental value’ of the real businesses we invest in. 

The ‘fundamental value’ of a business is the income it earns and distributes now and in the future. It’s these earnings that underpin a business’s real value through the market cycles that wax and wane in response to the hurly burley of world events.

Often a person’s perception of the risk of an investment is falsely heightened by this short-term volatility. They can lose sight of the longer-term stability of investing in strong businesses both locally and internationally.

We see this ‘perception gap’ in other areas as well. Take crime rates for instance: over the past two decades the broader community perception is that crime has increased or gotten worse. In fact, most statistical evidence has been that crime has consistently fallen over this period, both in Australia and internationally.

Which brings us back to investments – aside from recent market volatility and news cycles, the long-term approach to investing is ultimately driven by fundamental business valuations.

So, what is the business community experiencing in 2018? In Australia a poll of CEOs by the Australian Industry Group released in late January showed the economic outlook as more positive than any period since 2012. Over 67% of the business leaders surveyed expect increased sales and improved prospects for employment and business investment. 

Similarly, in the US the combination of good business growth and employment, along with low inflation, has some experts dubbing it ’the goldilocks economy’. Europe continues to experience broad growth and even Japan is showing signs of economic life.

Long-term investors are required to look past the short-term market movements and focus on participating in the real economy and the fundamental value and outlook of businesses. That’s certainly the approach of the investment team at Mine.

Signing off

Seamus Collins | Executive Manager, Portfolio Implementation

Past performance isn't necessarily an indicator of future performance.

Data sourced from Bloomberg and Australian Industry Group.