Riding out a rough patch

One demographer predicts the developed world will start roaring again in eight years, with Australia to be the fastest growing economy.

Summary: One demographer is predicting that the developed world is going through a rough patch, but will start booming again after 2023, with Australia set to be the fastest growing economy. This projected growth is due to a high immigration rate, which means Australia has a high proportion of adults aged in their 40s to early 50s, the bracket when personal spending is highest.

Key take-out: Demographic research reminds us not to give up on Australia, but at the same time it’s worth having offshore shares in case other forces overwhelm demographics. I like to market time my exposure, and Australia is moving close to warranting an exit from the share market and switching to cash.

Key beneficiaries: General investors Category: Economics and investment strategy.

Amid the gloom and doom of Greece’s debt negotiations and China’s stock market crash, America’s renowned demographer and market cycle analyst, Harry Dent, is predicting that Australia is better positioned than any other country to weather the slowdown in world growth predicted by the IMF and other international institutions. 

If he’s right then having a large exposure to the Australian share market makes sense since Dent has shown in his books, such as The Demographic Cliff, that there is a close relationship between a country’s “generational spending wave” and its general stock price index.

As can be seen in his hierarchy of macro-cycles below the developed world is going through a rough patch that started in 2008 and won’t end until 2023. Dent says Australia “has been flat from 2010 to 2015, but after this, it’s the only developed country with slightly positive trends into 2018”.

Source: Economics and Markets, 31.3.2015

This should be welcome news for Joe Hockey since further falls in iron ore prices have cast a pall over the economy and the government’s revenue forecasts.

On Dent’s projections, the world will resume booming again after 2023, with Australia set to be the fastest growing economy. The basis for this rosy outlook is demographics.

According to Dent “with the lower birth trends that come from increasing urbanization, wealth, and education, almost all developed countries have sideways (at best) to falling demographic trends for decades to come. But there are a few exceptions…And they are, in order: 1) Australia 2) Israel 3) Switzerland 4) Norway 5) Sweden and 6) New Zealand.”

Because Australia’s immigration rate is the highest of any developed country it has a high proportion of adults aged in their 40s to early 50s, the age bracket when personal spending is highest. Younger people have less spending power while older people are thrifty.

Australia’s peak spending age group was flat between 2010 and 2015, but is set to rise again between 2015 and 2018. It will then stall until 2023 after which it will burgeon until 2036. These projections are based on the known ageing profile of the population. Dent gives high weight to consumer spending because in developed countries it accounts for about 70% of GDP.

Of course Dent’s generational spending wave impacts only on domestic demand, not exports and the sad truth is that since 2011 our terms of trade have deteriorated due to falling commodity prices. So while our population is not ageing as fast as other developed countries, a collapse in mining investment and lower prices for our resource exports have caused a recession in national income per capita. And when living standards fall consumer spending is thwarted.

Also the federal budget’s repair depends largely on fiscal drag; namely Australian income earners moving into higher tax brackets over the next few years. That too will act as a brake on consumer spending as could Australia’s high household sector debt relative to its income.

Nevertheless, what Dent concludes is that “Australia simply has the best demographic trends of any wealthy, developed country.” Along with low interest rates, a devalued dollar, increased public infrastructure spending and low public debt, our high immigration program is working to offset the resources bust.

How the tug of war between pro and anti-growth forces in Australia pans out only time will tell. But from an investment perspective Dent’s research reminds us not to give up on Australia. That means holding local shares should we return to being the Lucky Country as Dent expects, but at the same time having offshore shares lest other forces overwhelm demographics.  

The easiest and cheapest way to achieve such a balance is to hold both Australian and foreign equity exchange traded funds (ETFs) listed on the Australian Securities Exchange (ASX). Such funds are available through any share broker or their online trading platform (see How to choose an ETF, July 8).

In my own case I like to market time my ETFs using both trend and momentum analysis so if Greece, China or some other crisis triggers a stock market crash I can get out early to protect my capital (see How you can still play the Greek market, July 6, where Clay Carter considered the Global X FTSE Greece 20 ETF at $US10.85. The ETF closed on Monday at $US10.77).

Here’s my latest trend analysis of the Australian share market (using the All Ords share price index) and my latest relative momentum analysis of world share markets (using core overseas share funds listed on the ASX).

For trend analysis I have used medium term (50 day) and long term (250 day) trend-line crossovers to generate buy and sell signals for any share fund that moves in step with the Australian stock market (such as the SPDR S&P/ASX 200 share fund).

Note this does not require forecasting the market, but just staying on the right side of its direction. When the medium term red price line is above the long term blue price line buy and hold the fund, but when that position reverses sell the fund and move to cash.

Simple trend trading strategy (based on backing a fund if its short trend stays above its long one)

For momentum analysis I have compared the six months relative price increases of three foreign equity sector ETFs (USA shares, other developed market shares and emerging market Asian shares) versus cash and gold ETFs (to provide refuge in a global market crash).

This simple ETF rotation model (run only once a week) would have sidestepped most of the 2008 crash and returned an average 9.1 per cent per annum in capital gains (before income distributions) since March 2009. Momentum investing is highly effective.

Simple momentum trading strategy (based on always backing the fund with the strongest price rise)

Note that Australia is moving close to warranting an exit from the share market (and going to cash), while for overseas share funds, IVE (which largely represents Europe and Japan) has the strongest relative price momentum over six months and is still doing better than cash or gold.

Whether Australia and the world are headed for a correction or crash or will escape such a fate should be known this week when Greece’s debt showdown and China’s share panic either worsen or ease.  I shall be keeping a close eye on both my trend and momentum charts to tell me whether to hold or sell my ETFs as events unfold.


Percy Allan is a director of MarketTiming.com.au. For a free three week trial of its newsletter and trend-trading strategies for listed ETF funds, see www.markettiming.com.au.