In stock market news, the All Ordinaries Index is approaching the 6,000 level.
Such mythical targets are often seen as “significant” in the minds of investors.
However, the market surpassing 6,000 is not going to help BHP mine more iron ore, CSL sell more flu vaccines or Commonwealth Bank of Australia overcome its public relations issues. It also ignores the wonderful benefits that dividends bring to the table, which when represented by the All Ordinaries Accumulation Index, shows that the market is 35 per cent higher than its previous peak of November 1, 2007.
But many investors are still nervous, despite strong portfolio returns, and will search for any negative stock market news. However, investors should not link any future market corrections with a fundamental shift in the attractiveness of shares as a long-term asset class. As highlighted previously, share markets don’t go up in a straight north-easterly direction all the time. The longer and higher the bull run, the bigger the eventual correction.
But is there more at play than just selecting great businesses that will see the sharemarket remain the choice for investment dollars? Are there other tail winds that could help provide investors with confidence that strong returns lie ahead? We believe the sharemarket will always be a wonderful asset class for investing in the emerging leaders. But there are two factors, outside of bottom-up stock picking, that also support our positive long-term view.
Rising tide of government money
Quantitative easing and low interest rates have flooded markets with money. While none has directly made its way to the sharemarket, accommodative business conditions provided by low interest rates are of significant benefit for companies we are invested in and for the sharemarket in general. While the bottom of the easing cycle appears to have been reached, its benefits will linger for some time before the momentum peters out.
The other government-related boom is the impending infrastructure super-cycle. As nations grow, the demand for better infrastructure, improving lifestyles and business efficiency, grow with it. A think tank made up of the Global Infrastructure Hub and Oxford Economics delivered a G20 initiated report estimating that by 2040 the world will need upwards of $US94 trillion to support economies. In Australia we will require $1.75 trillion. Half of the global sum will be needed in Asia. Given Australia’s close proximity, our companies both directly and indirectly stand to benefit from this impending massive investment.
Rising tide of superannuation
The total size of our superannuation pool continues to grow. The Willis Towers Watson Global Pension Assets Study 2017 found that Australia has the fourth largest pool of pension savings in the world of above $2 trillion. We also know that the investment management industry is worth $2.8 trillion in terms of home domiciled funds^. With mandatory superannuation contributions increasing to 12 per cent by 2025, coupled with the power of compounding returns, that pool is expected to get much larger.
All that money won’t make its way only to the share market. But if it makes its way into the economy through investments such as infrastructure building, employment, business development, profit growth and returns; then investors should benefit over the long run. That’s great stock market news!
Coincidently, Australia has the largest investment management Industry in Asia, surpassing both Singapore and Japan^.
There is a bit more to run yet.
So, while 6,000 may seem significant to some today, in 1929 the market suffered a deep correction. It was a crisis that required quantitative easing and infrastructure spending to turn the global economy around. Today, we don’t even think of the almost 50 per cent decline from the then all-time high of 50 for the All Ordinaries. This will also be the case with today’s levels.
Source: Global Infrastructure Hub and Oxford Economics 2017
So though volatility will remain, and being proactive and holding great fundamentally healthy businesses should remain our focus, rest easy that it will be some time before the market, and our companies, lose their long-term lustre.