Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Is now the right time to invest in sharemarkets?
As Australia gears-up to loosen restrictions, end lockdowns and reopen for business, the question many are asking is whether now is a good time to enter the market? Roger Montgomery, founder and CIO of Montgomery Investment Management, answers this in a short article titled, “Three reasons why I am still bullish on this market.”
Despite the economic damage Covid-19 has caused, Montgomery outlines three good reasons he believes sharemarkets will continue to climb over the coming year.
The S&P/ASX All Ordinaries index and the S&P 500 index are up 26 and 35 per cent respectively, which Montgomery says is “not bad,” considering that Melbourne, once the most liveable city in the world, is now the most locked-down city in the world. It has endured more time in lockdown than any other city, beating the former titleholder Buenos Aires, after roughly eight months in confinement. According to media sources, Melbourne’s record-breaking lockdown is costing the state economy $700 million a week.
Is there any light at the end of the tunnel?
Montgomery says, “Given a reasonable strategy is to spread investments out over a period of time, taking advantage of any weakness in prices that might ensue is pertinent. Of course, the risk with such a strategy is that investors miss out, when uninvested, if markets rise.” As was the case last month, when markets rose, the Montgomery Small Companies Fund gained 6.7 per cent outperforming its benchmark by 1.7 per cent. Here are the three reasons to stay positive:
Reason 1: The path to reopening – Montgomery says, “generally, macroeconomic data and dovish central bank monetary policy settings are overwhelming any fears of the Delta strain of Coronavirus disrupting the path of recovery and reopening.”
Looking at how highly vaccinated populations such as the US and Europe reopened, data shows that there was an instant rise in infections as restrictions eased; as seen currently with Victoria. But severe illness, hospitalisations and deaths remain low. This means that the vaccines are working. Overall, businesses have been largely hesitant to issue forward-looking guidance because the financial impact of the lockdowns are too hard to quantify just yet.
Montgomery agrees, saying: “for the moment, the consequence of local lockdowns and overseas reopening is that investors favour businesses with offshore earnings. Importantly, however, Australia’s attitude to COVID-19 is shifting. Consequently, vaccination rates are accelerating, and the idea of elimination has been traded for suppression until vaccination coverage reaches set targets.”
As it stands today, Australia is 45.8 per cent fully vaccinated, ranking 33 out of 38 in OECD countries. Australia is expected to reach 70% and 80% double dose vaccination? The federal government wants to see double-dose vaccination targets of 70% and 80% (of the population aged 16 and over) before restrictions ease. At current rates, Australia will reach vaccination of 80% of the 16+ population around 4 November 2021.
Reason 2: Low interest rates – While the pandemic has caused massive economic damage, the local market, together with the major US equity indices, is trading at near-record highs despite the potential winding-back in expansionary monetary policy by central banks. The RBA is optimistic the local economy will get back on its feet and hasn’t changed its plans to wind-back its stimulus plans.
Montgomery says: “The bullish argument, however, is that even if the US Federal Reserve’s goal of maximum employment, and inflation reaching two per cent, as well as being “on track to exceed two per cent for some time,” the Fed can raise interest rates up to four times with the real rate of interest remaining negative. This is bullish for equities through both valuation and popularity.”
Reason 3: Monetary support – Despite future plans, global growth remains supported by stimulus which “suggests central banks are in no rush to pull back on monetary support.” Montgomery says it is “Japan’s ability to monetise a significant portion of its government debt without major economic consequences, which provides something of a template for the West’s central bankers, who might otherwise doubt the policy approach hitherto adopted.”
Montgomery concludes by saying “Investors concerned about whether now is a good time to invest might consider presenting the above arguments to their adviser”. If all goes according to plan, central banks continue to support global growth and sentiment regarding the above factors continues, Montgomery expects another year of positive returns.
