Investing During Extreme Uncertainty

OPINION

As we return to work after a Federal Election and welcome a new government, there still seems to be no end in sight regarding the war in Ukraine, a worldwide energy crisis, food shortages, supply chain issue, COVID-19 and rising costs of living alongside the prospect of further interest rate hikes.

It seems that our economic future has never been more uncertain. Or are things really all that bad for investors?

Amidst the macroeconomic upheaval in the global economy, the question remains, “How does one remain calm, continue to be invested strongly, and actually take advantage of these changes in the global economic cycle?”

How Heightened Risk Can Increase Market Awareness

An analogy can be drawn from a social experiment conducted some years ago in Drachten, Holland, by a traffic engineer named Hans Monderman. He removed all traffic signs, speed control, and traffic lights in this city. Naturally, you would expect complete chaos to have ensued. Almost completely counter-intuitively, both fatality rates and car accidents reduced, while traffic flows improved.

It all comes down to personal risk assessment; when drivers have a constant level of heightened risk awareness, they become better judges of risk more careful and prudent in an environment with fewer road signs and other traffic measures.

The same concept applies to investing. When investors are constantly thinking about risk, being self-reliant and filtering through market noise cautiously, investor behaviour changes for the better.

It also demonstrates an essential truth about life and investing – risk is a constant — what changes is both our attitude and reaction to risk.

Macroeconomic Forecasts

Investors are often lulled into a false sense of security based on what other people are forecasting and thinking, they are caught up in speculative investment trends, often with undesirable outcomes.

The most pressing economic issue impacting all investors is the nexus between inflation and interest rates. How far will the RBA go in raising interest rates to curb inflation? This is now the centrepiece of all forecasts and market predictions. If rates are raised too quickly and aggressively, it increases the risk of an exceptionally prolonged recession. If our central bank is too lax, the inflation we are experiencing may morph into something more disturbing, such as stagflation, deflation, or even hyperinflation.

Thus, the question becomes: how reliant are we on forecasts when making investment decisions?

Below are the Big Four bank economists giving their best attempt at a forecast. Interestingly the CBA and financial market forecasts would differ significantly regarding overall asset prices, from notions of a modest correction to a full-fledged market collapse.

Taking the conservative estimate, if the CBA predictions are accurate, mortgage holders’ monthly repayments will increase by 14.6%, which is aligned with the last time we experienced a rise in the interest rate between 2002 and 2008.

However, if they take the forecasts priced in by the financial market, mortgage payers would be making 39.7% higher monthly repayments.

Risk Tolerance

Msquared’s view is aligned with the CBA forecast; that is, we would anticipate property prices falling 15%. However, our risk tolerance towards new opportunities is more conservative as we continue to prioritise asset preservation and have adjusted our risk profile to reflect an extreme decline in property prices.

As Voltaire said, “uncertainty is an uncomfortable position. But certainty is absurd”.

Embracing the volatile world we live in enables an investor to prepare and navigate uncertainty effectively.

The one thing that is certain is Mark Twain’s dire warning that “History does not repeat itself, but it often rhymes”. Market cycles have been around since the advent of money, largely a result of people’s emotions/sentiments. In other words, the market is not driven solely by economic fundamentals.

What is certain and predictable is that market busts will inevitably be followed by market booms, and vice versa. These cycles will continue so long as people make decisions regarding money – that is – forever.

Paul Miron has more than 20 years experience in banking and commercial finance. After rising to senior positions for various Big Four banks, he started his own financial services business in 2004.

MSQ Capital

msquaredcapital.com.au

There are 10 local council areas scattered along the East Coast of Australia that offer both affordability and solid fundamentals for sustainable future growth, according to the research team at residential property network, PRD. The areas have been selected based on five criterion. They are affordability – defined as a median house price below $600,000, rising house values, strong rental yields to encourage investment, a strong pipeline of residential, commercial and infrastructure projects to facilitate local economic development, and low unemployment.

Here are Australia’s 10 most affordable regional property markets with great future potential.

Mackay, QLD

Mackay is a tropical coastal area located in north Queensland. It’s known for its closeconnection to the Great Barrier Reef. The median house price is $462,750, up 8.9 percent in 2023. Mackay attracts a lot of interstate migrants and is home to more than 120,000 people. It has a healthy economy with an unemployment rate of 3.7 percent and $1.7 billion worth of projects due to commence this year.

Toowoomba, QLD

The Toowoomba median house price was up 10.9 percent in 2023.

Toowoomba is located west of Brisbane and is known for its Victorian buildings, street artand surrounding national parks. The median house price is $560,000, up 10.9 percent in 2023. The city has a population of more than 180,000. The unemployment rate is 4 percentand there is $6.1 billion in projects commencing in 2024.

Townsville, QLD

Townsville is a coastal city in north-eastern Queensland. The median house price is $420,000, up 5 percent in 2023. It is home to more than 200,000 people. Unemployment is very low at 2.5 percent and there is $3.2 billion of projects commencing this year.

Dubbo, NSW

Dubbo is located west of Newcastle in the Orana Region and is home to the Western Plains Zoo. The median house price is $530,000, up 11.6 percent in 2023. The population has exploded in recent years to more than 56,000 people. The unemployment rate is just 2.2percent and the economy is thriving. There is a pipeline of $4.7 billion in projects commencing this year.

Tamworth, NSW

Located in north-east NSW, Tamworth is known for its popular annual Country Music Festival. It’s also the largest retail centre for the New England and Northwest Slopes regions. The median house price is $490,000, up 14 percent in 2023. With a population of more than 65,000 people, the economy is strong with unemployment of just 2 percent and $112.4million worth of projects commencing this year.

Griffith, NSW

Located west of Sydney and northwest of Canberra, Griffith is known for its prime produce production and wine cultivation. The median house price is $531,000, up 2.1 percent in 2023. Griffith’s population is about 27,000 people. The city boasts high economic resilience with a 2 percent unemployment rate and $258.7 million in projects in the pipeline.

Ballarat, VIC

Ballarat is a 1.5–hour drive west of Melbourne. It’s popular with city commuters who move here for housing affordability and a relaxed lifestyle with easy access to the city via train. The median house price is $570,000, down 4.2 percent in 2023 but up 92.9 percent over the past decade. The city has the third highest population in Victoria at about 118,000. Ballarat has an unemployment rate of 3 percent and a total projects pipeline worth $2.3 billion for 2024.

Shepparton, VIC

Shepparton is a rural area about two hours north of Melbourne. It is popularly referred to as ‘the food bowl of Australia’. The median house price is $475,000, up 4.4 percent in 2023. The population is about 70,000. The unemployment rate is just 2 percent and there is $1.8 billion in projects for 2024.

Wodonga, VIC

Wodonga is located on the border of NSW on the southern side of the Murray River. It is approximately 320km from Melbourne and 345km from Canberra. The median house price is $567,250, up 4.7 percent in 2023. With a population of about 44,000, the city’s jobless rate is 3 percent and there is $388.2 million in development set to commence in 2024, primarily new infrastructure.

Burnie, TAS

Burnie is a bustling port city located in Emu Bay in Tasmania’s north-west. Overlooking beaches and parklands, the area is known for its rich agriculture and mining projects. The median house price is $435,000, up 3.6 percent. Despite a rising population, the unemployment rate is falling and is currently 5.6 percent. In 2024, Burnie’s project pipeline is valued at approximately $1.6 billion. A significant portion is commercial development, primarily renewable energy projects.