FYI | May 10 2017
By Peter Switzer, Switzer Super Report
What France and the budget can do to our stocks
With the Budget looming and the French election delivering the right President for the Eurozone as well as the value of the euro and European stock markets, worldwide stock markets (including ours) can breathe a sigh of relief.
That French vote was the electoral win financial markets had to have and if it had gone the other way, our market could’ve been down 3% or more today!
Of course, our Budget is more important to us but if Treasurer Scott Morrison comes out with a shocker of a Budget on Tuesday, Moody’s could quickly take our triple-A rating away from us, the dollar would fall, interest rates would start to rise, capital would leave the country and the stock market would at least have an initial slump.
On 5 August 2011, the USA lost its triple-A rating and the Dow fell nearly 6% for the week, the S&P 500 lost 7% and the Nasdaq dropped 8%. It was the worst week for the S&P 500 and the Nasdaq on a percentage basis since November 2008, and the worst week for the Dow since March 2009.
Reuters described it all this way: “The United States lost its top-tier AAA credit rating from Standard & Poor’s on Friday in an unprecedented blow to the world’s largest economy in the wake of a political battle that took the country to the brink of default.”
So politics can be critical to a top rating and I hope our ‘off with the pixies’ Senators take note of this scary piece of history.
And fiscal battles can trigger a ratings downgrade. Reuters again: “On August 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S&P had called for as a good “down payment” on fixing America’s finances. The political gridlock in Washington over addressing the long-term fiscal problems facing the United States came against the backdrop of slowing U.S. economic growth and led to the worst week in the U.S. stock market in two years.”
When this happened, the damage was not restricted to Wall Street with our stock market then slumping to the lowest level in two years.
So the pressure is on Scott Morrison and despite the rubbish written by politically-inspired media commentators, the reference to good debt and bad debt is actually a signal to Moody’s and other ratings agencies that this Budget will address two things. Firstly, bad debt-creating recurrent spending and secondly, good debt-created spending on such things as infrastructure outlays.
Australia is becoming more reliant on its tourism trade and I don’t think the one million Chinese travellers who come here each year will care if they are flown into Sydney’s second airport at Badgery’s Creek and then whisked off to a CBD hotel by train or by a bus on a much faster M4 tollway.
Tuesday is an important day for Scott Morrison, the PM and the Oz economy and I hope my ex-student can deliver.
Today’s reaction to the French election should be interesting, as Europe has recently become a bright economic spot and its stock markets have been rising faster than US equivalents. Meanwhile, Donald Trump’s struggles with the Congress have also weakened the market enthusiasm for the man who promises to make America great again. If he can pull off his tax plan, it’s likely to spread the market-loving messages of lower taxes and more infrastructure spending worldwide and help stocks in the process.
Putting all these recent reasons for market negativity together, along with some relatively soft Chinese economic data just as it produced a 6.9% economic growth number in the March quarter, helps explain the softness of stock prices of late.
Now that Emmanuel Macron has won and if Donald Trump gets a lot of his tax changes up, Europe continues to grow faster than expected, the US keeps creating 211,000 jobs a month, as it did in April, and our economy grows as fast as the Reserve Bank thinks in the 2.75% to 3.75% band, then stocks are the place to be in 2017.
If May to October brings a bit of a stocks drop, as can happen, I will be a buyer, as I have been saying since 2009.
Over that time, the index has gone up about 75% and with dividends it has been over a 100% comeback, so the strategy has been good for the patient long-term investor.
We are not in the euphoric stage of the stock market cycle, which often brings along a market crash, and the best observation came from Bell Potter’s Richard Coppleson who advised; “sell the banks”. He quickly added that he thinks they will be higher by year’s end.
Do I need to say more? Oh yes, I’d add that I expect mid-cap stocks will continue to do well, so watch what our experts like and eventually small caps will make a comeback, so there could be some good contrarian buying right now for the more patient investor.
The last time I said this was when BHP was around the $14 level and Woolworths was around $20 and they kind of worked out nicely.
And finally, let me conclude with “Viva La France!”
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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