Enjoy the ride – while you can

Investors should be prepared to react quickly, warns Ross Greenwood

Ross Greenwood

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THE STOCKMARKET IS ALWAYS forward-looking. Forget it at your peril. The performance of the market since late last year has been nothing short of remarkable. Those who put their money in the bank, accepting lower rates in return for the safety of their capital, might now be rueing that decision.

In my experience, the markets and economy are now displaying almost classic behaviour. After a period of economic tightness both locally and internationally, things are picking up – largely sparked by lower interest rates and, overseas, the printing of more money.

The first that have benefited – as I indicated in Money’s December-January edition – are the yield-based stocks. So banks and property companies have seen big gains, followed by a range of others, starting with the resources giants on the back of an improved outlook for China.

What happens next depends partly on the Reserve Bank and how long it stays with its easier money policy. And there are signs the market is changing its opinion about interest rates falling for the duration of 2013. While short-term rates remain low – below 3% – the longer-term rates have started to rise. Six months ago there was an inverse yield curve, where short-term rates were higher than long-term rates. This implied investors were not prepared to invest in longer-term investments such as shares or property. In many economists’ eyes, an inverse yield curve is an indicator of an economic slowdown or even recession.

Today that inverse yield curve has reversed. The longer-dated government bonds’ rates are higher than short-term rates – which implies a more normalised economy and perhaps even better economic times ahead. The trick now is not to miss out on what could be improved returns from shares and property, but not to be so blind to imagine it’s a one-way street. Europe’s economy remains fragile and so even a quick glance at the market charts from 2012 show you the nervousness of investors.

The herd, however, will always run together. You superannuation fund return demands that the pack remains close. And that’s why a general market rally will be supported by the biggest investors in the country. Takeover activity is likely to pick up and, as the confidence returns, the banks will start to make credit more easily available. There is even the potential for building activity to grow as the demand for city office space picks up the slack.

But you have to move quickly to take advantage of the present situation. Understand that markets will very quickly overcook the value that appeared in the past year. The Reserve Bank will be paranoid about not creating inflation from its lower interest rates. The mood, when it does change, will change very quickly indeed.

Then the pressures will become altogether different. But that chapter is likely to unfold in the coming six months. Falling interest rates are welcomed by households and business – but actually, counter-intuitively, reflect an eroding economy – and rising interest rates (that are reviled) are symptomatic of an improving economy situation. These notions are hard to shake off.

In other words, be quick to react but be careful in what you wish for. These markets are not so difficult to forecast.

The harder thing is to be patient, to anticipate the next chapter and to be ever vigilant about the left-of-field piece of information that could change this cosy picture in a heartbeat.

Ross Greenwood is Channel 9’s finance editor and Radio 2GB’s Money News host.

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