Cash is safe but a poor option for longer-term investors
Morningstar’s latest summary of asset class returns shows that Cash has provided the lowest returns of all asset classes in 4 of the last 5 years and Cash’s highest annual return was only 2.3%. Cash returns are very unlikely to be any higher in 2020 and possibly lower, so while Cash remains very safe, the low returns make it an unattractive place for investors with a medium to longer-term timeframe. When you take into account inflation and taxes, investors are likely to go backwards in real terms on their Cash. A sizeable cash holding won’t make sense for most people unless they are extremely risk-averse or expect to use the cash for some purpose in the relatively near term.
A challenge for investors – Share-market valuations are looking stretched
While Cash is not an attractive investment for most people, the other side of the coin is that assets offering higher returns, like shares, have seen increased investor appetite and this has arguably stretched valuations. Some caution is warranted given that the US & Australian share markets are at record highs. Legendary investor Howard Marks recently commented:
“The (US) market has been up for 11 years, it’s quadrupled off the low, we’re in the longest bull market, the longest expansion in history. Profits are not rising, stock prices are. It’s what we call a liquidity-driven rally, and that means it comes from people having a lot of money to spend. If you put those factors together, it doesn’t mean the market is going to go down tomorrow, but it does mean that the odds are not, in my opinion, in the investors favor.”
Another factor suggesting that share markets may be somewhat overheated is that nearly all the gains of the past year are attributable to increased valuations rather than increased profits. The chart below shows the contribution to an investor’s total return from dividends, earnings growth and changes in valuation and clearly the last factor is dominant in all markets. Hopefully 2020 will see earnings growth to justify the lofty valuations already embedded in market prices.
My take on all this is that staying invested in line with your goals and your financial and emotional ability to deal with investment volatility is the right course for most people – not too conservative or unduly aggressive. Now is not the time to chase higher returns unless you could comfortably handle a significant unexpected and unpredictable downturn. While the positive outcome from increased exposure to growth assets currently rising in value might sound appealing, if there is a real risk of an alternative outcome having serious, potentially devastating effects on you, don’t take additional risk as no-one should be too confident about the likelihood of a good outcome.
Are geopolitical shocks a threat to share prices?
It is reasonable to assume that the outbreak of a war or other geopolitical shocks would be bad for share markets, though past events indicate considerable resilience in financial markets in response to geopolitical crisis events. Share markets can be volatile for a while, but the impact to stocks from geopolitical events historically has tended to be short-lived. It appears that little short of full-fledged world war between nuclear-armed powers would be required to have a durable impact on financial markets.
The World’s Largest Cities
According to the United Nations, there were 33 cities with populations of 10 million or more in 2018; these were the world’s 10 largest cities:
- Tokyo, Japan (37.5 million)
- Delhi, India (28.5 million)
- Shanghai, China (25.6 million)
- São Paulo, Brazil (21.7 million)
- Mexico City, Mexico (21.6 million)
- Cairo, Egypt (20.1 million)
- Mumbai, India (20.0 million)
- Beijing, China (19.6 million)
- Dhaka, Bangladesh (19.6 million)
- Osaka, Japan (19.3 million)
Missing from the top 10 are New York City, which held the No. 10 spot until last year, Moscow 24th, Paris 28th, & London 37th with 9.0 million. Sydney & Melbourne are well down the list, despite rapid population growth over the last 20 years, but are larger than many major European cities, such as Amsterdam, Berlin, Vienna and Rome and not far behind Madrid.
There is plenty more change coming with population falls in several Eastern European countries & Japan being more than offset by continued strong population growth in Africa, in particular. By 2050, the UN projects the world’s population will have grown from the current 7.7 billion to 9.7 billion. Nigeria’s total population forecast to double to 400 million, with 70% living in cities, surpassing the U.S. where the population will rise from 330 million to 375 million.
The very large populations in developing countries and increasingly affluent countries like China highlights why investors should consider opportunities in emerging markets
Sydney’s rapidly growing population has big implications
In December the NSW Department of Planning, Industry & Environment updated its population projections for Sydney. Sydney’s population is projected to increase by 2 million people in the 22 years to 2041 – equivalent to adding a Perth. Not surprisingly this has many implications including great pressure on infrastructure – roads, rail, schools, hospitals – as efforts by the State Government to keep up tend to lag the rapid population growth of nearly 100,000 per year. No wonder the size of Sydney’s desalination plant is about to be doubled. Unfortunately, the cost of infrastructure investment required to keep pace with population growth is higher than in the past due to diseconomies of scale e.g. tunnelling and land acquisition.
You have to wonder whether at some point there will be a backlash against such rapid growth which is primarily driven by immigration. While there has been some talk of cutting migration rates, in 2018/19, 238,335 more people came to live in Australia than departed. In 2017/18 it was 238,224 so there has been no change and it remains a historically high number.
The rapid population growth is also expected to mean that over the next 40 years the percentage of people living in a detached house in Sydney will fall from over 50% currently to around 25%. Townhouses and apartments will be where most people live as is the case in many very large cities overseas.
This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.