The 10 hazards worrying markets

Summary: The factors all investors should be aware of that will continue to impact portfolios.

Key take-out: While most issues are out of one's control, there are some that can be addressed.

As is my habit, last week I was up each day at 5.30 scanning the Wall Street market, which still had two and a half hours to trade.

It was Thursday morning and Wall Street was doing well on the back of a clear indication that the Huawei Chief Financial Officer arrest was not interrupting the trade negotiations between the US and China.

Indeed, China had made concessions and President Trump had indicated that he would consider the situation. There was certainly no deal, but the negotiations were still continuing despite the arrest.

Then the US market began to fall away because a new hazard had arisen – this time it was higher interest rates. The late decline on Wall Street caused the Australian market to virtually mark time. And then it hit me that the great problem Australian and world markets have is that there are just too many hazards out there – you no sooner get one under control and another one bobs up.

Sometimes events are bullish but then they suddenly swing the other way. I wrote down 10 of the hazard forces that are worrying markets in Australia and the world and I think if I kept going I could make the list longer. It is these local and international uncertainties that are key reasons why shares are fluctuating, but overall are performing badly around the world and in Australia. Here is my list:

1. The Huawei arrest.
2. The US-China trade war.
3. The US growth. Sometimes the signs are it is roaring ahead and other times it is softening because different parts of the economy are performing at different rates.
4. US monetary policy. Interest rate thrusts move from hawkish movements predicting lots of rises ahead to dovish forces where interest rate rises will be restrained.
5. And that leads us to a range of people who suggest that Wall Street is too high given the hazards and another group that are equally as passionate that the fall has barely started.
6. In Australia we have an economy that looks strong but is being propped up by deficits, particularly in the states and the aftermath of a housing boom. Accordingly, we have bullish statements based on current figures and bearish views based on the slump coming in housing activity and the fall in house prices.
7. The ALP tax policies on negative gearing, capital gains tax and the dreaded retirement and pensioners’ tax threaten to smash the housing market and make life a lot more difficult for battling older people. Consumer spending is on the front line.
8. Australian banks are very vulnerable to any further big falls in housing prices because it will send a lot of their customers into negative equity. But those house price falls are being caused by the credit restrictions imposed by the regulators. Banks are fearful of massive threats from shareholders and big payments to rectify business mistakes where customers were charged when they shouldn’t have been. Banks drove our market upward and are now under incredible pressure.
9. China is clearly slowing and that is affecting the price of our minerals, so reports coming out of China can boost markets or send them down.
10. Then we have the mess in Europe plus Brexit which, although somewhat remote from Australia, can still affect world markets and therefore Australia .

That is too many significant variables and that is why we are going to see a lot of volatility in our markets and why we are likely to be in a bear phase for some time.

Banks, housing and the impacts of potential tax changes

During the week I was talking to a broker who looks after long-term investments for clients and he finds the banking market too hard.

There is clearly potential value there, but there is also danger and indeed the markets in the big four bank shares are effectively predicting that in the medium term the banks will be forced to reduce their dividends. If that market prediction was wrong, then bank shares would rise considerably. But this broker is not prepared to take the punt for his clients.

On the other hand he looks at the hammered stocks of Boral and Adelaide Brighton and some of the retailers like Harvey Norman and JB Hi-Fi where the price earnings ratios are getting low. I think we have to expect that the major housing downturn that is ahead of us (as long as the credit squeeze continues) will affect all those who concentrate on the housing business.

But infrastructure spending, particularly in Victoria, is very strong and there will be a substantial demand for quarrying products, steel and a range of other services. That infrastructure expenditure will to some degree insulate the economy from the housing downturn.

This week I found myself in the company of a couple in a very similar situation to hundreds of thousands of other Australians. They have a relatively small self-managed fund and they enjoy undertaking the investment process. Their total funds were greater than the pension cut-off, but the cash franking credits are an important part of their income structure.

But now the bank shares plus Telstra that were the foundation of this franking credit income have fallen to a level where they are very close to triggering a government pension. Because they did not apply for a government pension before the cut-off date of March 28 they are not entitled to franking credits.

They considered winding up their self-managed fund and putting the money into personal accounts. This would not help them with their franking credits because the tax-free threshold means that their franking credits would still come in cash form. Their only alternative is to transfer their funds into an industry fund and that way they would get their franking credits in full.

It is absolutely scandalous political behaviour to tax people based on their choice of fund manager rather than on their assets/income, which is the way we have always done it is Australia.

The couple don’t want to put their money in the hands of an industry fund or a big retail fund for that matter – they actually want to manage their own money. The best recommendation I can give them is to go and see their local member. If that person is an ALP person or if they are in a seat that might be Coalition but in which Labor has a chance, then they should also go and talk to the Labor candidate.

And I would urge all my readers to do just that and make sure that the individual candidates understand the horror of this proposed tax, which does not affect the millionaires but does hit battlers and will potentially be imposed on the basis of who manages the money and when people were born.