Businesses are ready for a shift to a more positive mindset, and investors are sensing the change.
So much has changed this year it’s not easy to plan for what comes next, but clarity may be closer than some believe.
If recent events are a guide, sometime after Christmas there will be a significant swing in the national and international business pendulums, from pessimism to optimism.
Most people in Western Australia will probably not notice the difference because the mood here never sank as low as that in Melbourne with its rolling lockdowns, or in much of Europe and the US, where COVID-19 has made life a misery for millions.
However, for many business managers and investors, the difference between 2020 and 2021 will be significant, with the biggest change being it will be safe to look outside the state for economic growth and travel opportunities.
The transport and tourism industries will be among the first to benefit from the return of free movement between the states, and even if WA is last to join in there are already signs of an awakening.
Despite withdrawing from the international market because of COVID-19, Qantas Airways has been a star on the stock market during the past seven months.
Its share price has risen by 114 per cent, admittedly off a pandemic-caused low of $2.14 in mid-March, to recent sales at $4.58, a price roughly the average for the stock over the past 20 years.
The rush to buy Qantas shares points to investors’ belief that the airline can rebuild its domestic business.
Qantas says its aim is to be back to 50 per cent of capacity by Christmas and 90 per cent in the first half of next year.
The airline’s international operation, which has never been a big source of profit, could return later, but for now Qantas will stay close to home and a largely captive market.
Whether investors have got ahead of the game with Qantas is an interesting question because it seems unlikely that the airline will be in a position to resume paying dividends for at least another 12 months.
It’s likely the share price rise is as much a measure of pent-up demand for investment opportunities as it is confidence that change for the better has started.
A number of other major events will help change the shape of the business environment, although not necessarily for the best in some cases.
- The taming of COVID-19 through the development of a successful vaccine. And while it might be premature to forecast success, there are sufficient indications from medical trials to be confident the disease will either be controlled or managed in a way that lifts the current limitations on trade.
- An easing of tensions between the US and China, with both sides unlikely to pursue policies leading to a full-scale cold war. This scenario is especially likely if (by the time you read this) Joe Biden is US president, with the change in leadership an opportunity to clean up a messy relationship.
- For Australia, an improved US-China relationship will have positive flow-on consequences, creating an opening to heal a rift that threatens to damage trade in agricultural and mineral exports.
- WA’s mining boom, which has fired up the iron ore, gold, and nickel industries, should continue for a little longer, but not indefinitely. Mining booms never last forever, and rival regions will shake-off the effects of COVID19, with the return of Brazil as a significant competitor an early warning of what’s to come.
- Iron ore in particular has almost certainly hit a ceiling, not only because of Brazil’s resurgence but also because steel demand in China is peaking as the effects of the economic stimulus wear off. In addition, new mines are being developed in other countries, especially Guinea, where the giant Simandou mine is heading towards first shipments in 2025.
- Gold, despite trading close to its all-time high of $US2,067 an ounce in August, is struggling to hang on to a price of $US1,900/oz as global optimism rises and talk starts in financial markets about the next major move in interest rates being up after years of decline. Higher rates, especially in the US, are gold’s worst enemy.
- A possible change in the direction of interest rates was first observed in long-term US Treasury bonds, which have been edging up since early March. Thirty-year bonds have risen from a decades’ low 1.022 per cent to 1.682 per cent, and while still spectacularly low, it’s the trend bond investors are watching.
- For investors, a whiff of higher interest rates will be welcome, even if it could take months (if not years) to flow into Australian savings rates. For households and homebuyers, the threat of higher interest rates is a threat that might not be just around the corner, but is lurking somewhere down the street.
That list of changes is not complete or perfect, but the key point is that times are changing, and if there’s one common trait of successful businesses and investors it’s an ability to adapt to change.
Rates panic
ON the question of interest rates, investors seem to be making seriously distorted decisions in the hope of eking out a few extra cents on their savings.
Because banks are paying less than 1 per cent on most deposits and government rates seem likely to fall as low as 0.1 per cent, there is sense of panic among long-term savers, especially pensioners, who are watching their wealth and retirement plans fade alarmingly.
But what happens next is the real story, and it’s one that will not have a happy ending; because as people feel poorer they amp up the risk profile of the savings in the pursuit of a higher return, even if it carries a disproportionate increase in risk.
The worst example of what’s happening is the recent ‘discovery’ by a number of investment advisers that gold is a worthwhile retirement asset, advice that is as daft as it is 12 months too late.
The daft aspect is the argument that gold is as good as cash because neither pays interest (or not much in the case of cash) whereas gold could deliver a capital gain.
There are, of course, two huge holes in the gold-for-saving argument.
Firstly, gold has had a good run but is struggling to move higher, which destroys the capital gain argument.
Secondly, if/when gold slips lower, there will be capital losses to consider on top of the zero-interest problem.
Cash in the bank, however, carries a government guarantee up to $250,000 on most accounts.
