Keep Your Eyes on the Finish Line

“The true investor welcomes volatility…a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.” – Warren Buffet.

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The EW team and I have recently embarked on a challenge to cover 100km over the month of November to raise money for a charity called Youngcare. Youngcare is a national charity with the objective of helping young people with high care needs to find suitable housing arrangements. Without the support of Youngcare and charities like Youngcare, these young people would be forced to live in retirement villages with people several times their age.

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If you would like to assist us in raising funds for this very worthy charity, then please click on the link below or reach out to any one of the team to learn more about this need and we will be more than happy to assist.

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https://fundraisingatwork.gofundraise.com.au/page/EmanuelWhybourne

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To kick off our fundraising campaign we all participated in the Bridge to Brisbane (Brisbane’s equivalent of City to Surf) last Saturday with our families. It was a very hot Brisbane spring day, and the heat was compounded by the black tar road we were walking on. Whilst some of our members ran the 10km walk, my wife, our 2 kids and I did the 5km walk. I do not like running or walking so 5km for me, would normally feel like the equivalent of a 20km+ distance. However, that was not so on this day.

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I thoroughly enjoyed the walk because there was just so much positive energy from all the participants and many spectacles to observe along the way, such as an opera ensemble singing to a grand piano in the middle of an underpass. It was distractions like this that helped to take the mind off the task at hand. Along the way we saw several people being helped by the medical staff, presumably for heat stroke, and there were several up hills and downhills, twists and turns.

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It occurred to me that this is the perfect analogy for wealth creation and the journey we take clients on once they entrust their investment portfolios to us. I knew with a high degree of certainty where the finish line was, it was 5km from the start line and I had studied it on a map. What I didn’t know was how long it would take me to get there and what that journey would feel like over the 5km. Would I finish it in under 30-minutes or over an hour? Would I get a blister along the way? Would the kids spit the dummy and complain the whole way?

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In financial markets there are so many variables that are completely out of our control so the shorter the time horizon the less certainty we can give you on what the journey will be like, conversely, the longer the time horizon you have (we advise at least 5 years +) the more likelihood we can give you around reaching the finish line. I have seen this time and time again with clients and every journey is different.

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As I sit here typing away this morning, financial markets are once again teetering around all-time highs, bitcoin has broken a new high and we are once again hearing about how inflation may impact returns over the next few years. I have been around for a few market cycles now and it’s amazing watching history repeat itself.

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What markets are going to do in the short term is in my view irrelevant. What is far more relevant is investor psychology. A recent blog post by the US Author Ben Carlson (A Wealth Of Common Sense) breaks down the chance of a positive return over various time periods. Unsurprisingly, the longer your time horizon the bigger chance you have of a positive return; this is represented clearly in in the graph below. To me this shows that statistically the right time to invest is always going to be today and this is something we constantly remind clients.

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The traditional definition of risk in most people’s minds is the risk of losing capital however we disagree with this view. We like to define risk as the risk of requiring the capital at the wrong point in a market cycle. As advisors it is our job to make sure that you don’t ever have that problem. It is our job to make sure there is always going to be enough liquidity to fund any emergencies or to fund a lifestyle for a given period of time. The rest of an investment portfolio should be invested in longer duration assets such as equities.  

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For example, if you want to invest in the share market today but you know you want the funds back next week then you may as well go to the casino and flip a coin. This is because in the short term, markets are incredibly irrational, it is only over the longer term that fundamentals typically prevail which is why we stress wealth generation is a long-term game, it doesn’t happen overnight.

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So, if today is the best time to invest then what is the outlook for markets over the next few years?

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This is not an easy question to answer as there are so many moving parts but for the most part we are broadly positive on the medium to long term outlook for equity and risk markets.  

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Australia

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The thing to watch here is inflation and if it will bite in or not. In my view, the number one category is wage growth as if wages go up then spending will increase which should in turn push prices up. Our esteemed treasurer, Philip Lowes view is that it is unlikely we will get a meaningful increase in wage growth any time soon as employers have been more likely to offer better working conditions such as increased flexibility and other benefits rather than embedding a higher cost structure. He recently stated that its possible we could lift the cash rate by 2023 (which is still a long way away). Given that markets have already priced in 4 hikes over the next year I would argue that most of the downside risk to bond and equity markets due to interest rate movements has already been priced in. (source: The world according to Philip Lowe – Financial Review, 11/4/2021 (smedia.com.au))

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Global Equities

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New York based market strategist Ed Yardeni believes that this year’s equity rally has been very different from 2020. Last year was driven by multiple expansion whilst this year has been driven by earnings which is very healthy. He believes that an earnings led bull market is less prone to sell offs and corrections because it is supported by fundamentally strong earnings. They believe that S&P will finish at 4800, 5200 & 5500 over the next 3 years consecutively.  (Source: S&P 500 ‘melt-up’ now driven by earnings: Yardeni (afr.com)

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UBS Asset Management’s view is that they are positive on equities over the next 12 months. They believe that the economic recovery will continue on the back of robust global growth and still accommodative financial conditions, they also believe we will continue to see earnings growth come through. (Source: UBS Macro Quarterly; Macroeconomic themes and tactical asset allocations opportunities, 4Q2021)

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Obviously one of the biggest risks to global growth is what happens in China. After achieving their growth targets and poverty reduction targets over the past 20 years, Chinas policy makers have shifted their focus to “the three mountains” for young families being affordable housing, education and healthcare. According to Pinebridge analysts, the risk of further regulatory and policy change is muted as there is only so far it can go. This will however cause a drag on economic growth for years to come. This could have deflationary effects on the global economy that, if inflation does seep into the global economy this could act as an effective counterforce (Source: Pinebridge Capital Market Line, Quarterly Five year forecast of relative risk and return across asset classes, September 2021)

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At Emanuel Whybourne our investment committee is still very constructive on this market cycle. We are positive on the medium outlook for equities with a preference for global over Australia, but we are still very cautious about having index exposure with a strong preference for active management and “stock picking”. This is a strange world we live in, and the next decade will produce some huge winners and in turn some huge losers, many of these will be high weightings in current index market caps.

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These are very strange times for financial markets. We are in the midst of highest rate of technological disruption the world has seen since the industrial revolution. We are also in the middle of the healthiest venture capital market Australia has ever seen and at the same time, we are witnessing the birth of an entirely new asset class in crypto assets. What a time to be alive!

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We often like to look to the Australian Future Fund as an indication of where the smart money is and as at 25 October 2021 they had a 13% allocation to Alternatives and a 17.3% allocation to Private equity (source: Australian Future Fund Portfolio Update, 25 October 2021). I am not inferring they have an allocation to crypto markets as this is not disclosed but it highlights to me that to invest successfully in this market you really need to employ a “think outside the box” mentality and have an open mind.

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I for one am incredibly excited about the markets we are investing in and their 10-year outlook but as I set my sites for the finish line, I also expect there to be several bumps, twists and turns along the way, we must keep our eyes on the finishing line at all times!

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Kind Regards,

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Tim Whybourne