Written by Jill Fraser
thinkbig surveyed leading economists, academics, financial strategists and the nation's top social demographer for insight into what lies ahead and how best to structure a wealth creation portfolio that has a projected lifespan of two to five years-plus.
High interest rates and the global financial crisis weigh heavily on one side of the economic scale while escalating mineral prices push down hard on the other and in the middle teeters Australia's economic outlook, which will be determined by the upshot of these two opposing forces.
Economists are forecasting a prolonged period of high inflation, slower market growth, an increase in unemployment and a robust Australian dollar but how long will this climate last and what does it mean for wealth creation?
The question is whether this turbulence is just an irritating hiccup in the midst of booming prosperity, with the expectation that the stock market will rally and property will hold its value, or the beginning of a substantial slowdown, with financial markets de-leveraging, interest rates remaining high, price inflation continuing and equity markets stalling.
Professor Neville Norman, is an Associate Professor of Economics at the University of Melbourne, immediate past President of the Economics Society of Australia and senior advisor to companies and State and Federal government bodies.
Professor Norman identifies three dominant forces that will shape the economy over the next two to five years:
1) The past - a well managed economy gaining from the growth of China and India and supporting our export markets and basic deregulation of the financial and manufacturing sector, which has been good for enterprise.
2) The mismanagement of financial affairs in the US, which won't necessarily lead to recession here or in the US but dampens the shortterm returns for financial investors and businesses.
3) No change of government in Australia over the next five years due to a weak Opposition.
"The Federal budget slowed inflation, which is a positive for long-term wealth creation. The problem is that escalating oil prices are going to cause inflation to rise and there's nothing the budget could have done to stop that," he says. Professor Steve Keen, Associate Professor of Economics, University of Western Sydney, says: "The basic argument I'd make is that what we've been calling wealth creation over the past 20 years has been leveraging up gains in asset prices and hasn't been creating wealth at all."
Keen asserts that we have now reached such a degree of leverage that sustaining the debt on the leverage has become impossible and asset prices are unwinding in the other direction, following the debt down.
"I think the only wealth creation strategy of any sense for the future should be doing what ever possible to avoid debt and get out of leverage," he says.
Declaring that America stocks are four times the long-term average in terms of their ratio to consumer prices, which means they're four times over valued, he says that Australian stock are over valued two fold.
"We use a whole range of unreliable indicators. One is price to earnings ratio because a huge part of what we call earnings for a large number of firms is actually capitalised asset price appreciation.
"What that means is that what we've been calling earnings are just inflation and asset prices."
Keen would avoid Australia property because "it's the most overvalued it's been in its history - more than in America".
"American property looks like it still has about 50% to go down before it's back to a long-term trend. Australia has even further to fall."
Where would Keen put his money? "In government bonds and cash."
Professor Fariborz Moshirian, Editor, Journal of Banking and Finance, School of Banking and Finance, The University of New South Wales says all indications are that the resource boom is going to continue over the next 20 years.
"The Australian economy is de-coupling from the United States and it is part of the China/India equation and as they keep growing and demanding resources we are going to prosper," he says.
There are more than 50 million middle income consumers in India and China and it is predicted that by 2025 China will represent 40-45% of GDP of the world's economy a year.
Moshirian forecasts that our agriculture sector will also reap the benefits of our relationship with China and India and flowing on from that the infrastructure sector because getting resources to market will require a vastly improved railway system and ports. In the next two to five years Moshirian predicts that the banking sector will become healthier, stronger. "Hence we are not going to see too many negative surprises in capital markets," he says. Regarding property Moshirian says that unlike the US, which has an oversupply of housing, Australia has a shortage.
"We are going to see a strong migration of skilled workers, which will increase the demand for houses," he says.
"Therefore I cannot see the price of houses coming down."
"It's going to rise steadily. Queensland and Western Australia will lead the way because of their resource boom but I expect NSW will catch up over the next two to five years. The shortage of land in Victoria will cause prices to remain strong."
Wealth advisors caution against risk.
Dr Doug Turek, Managing Director, Professional Wealth Pty Ltd suggests that because it's so difficult to anticipate where the investment markets and the economy will be in a few years time the wisest strategy is to adopt a "no regret" approach.
Maintaining that "no regret" moves work well at a time when uncertainty exists in the economy, he says that this entails de-risking, diversifying and embracing quality.
"We went through a period of booming investment markets, which saw people becoming super confident about the way markets would work," he says.
"They took on extra debt, invested in alternatives and things they didn't understand, didn't hold as much money in cash and forgot why we have bonds and a portfolio. And suddenly we've experienced an event that reminded us why we have a defensive part to our portfolio and why we hold our debt levels at a certain limit."
Turek argues that even in a boom there's a chance of over exposure. "Things can easily fall off the perch", he says, "and people often forget that their job is to manage risk not just manage investments".
"In a period of prosperity we let our winners ride and that's okay because we get capital gain, we postpone tax. But having 40% of your portfolio in any stock, even BHP or Woolworths, is not a good risk.
"Why put your quality of life into the hands of Chinese who are buying our ore or steel," he declares, noting that one of several surprise "X-factors" that may throw the economy sideward is that overnight China could suffer political instability or a financial hangover after the immense pre-Olympics construction. His advice to small business owners is to carefully determine how much of your wealth is re-invested into the business.
"If we have a poor economic future taking some money out of your business and putting it into defensive assets might be a prudent strategy," he says.
"That way you're covered if the demand for your services diminishes. "Personal coaching might be the flavour of the month at the moment but in an economic slowdown especially a severe one, something like this will be one of the first things that people cut out."
Peter Connolly, financial planner, Centric Wealth Advisors Ltd believes we should lower expectations based on abnormal returns over the last five years and consider where profits will be made from passive investments and share markets over the next five years. Broadly he expects that share markets will generate around 5-6% above inflation. He believes that the sectors most likely to benefit are energy (in particular alternative energy sources such as bio fuels and ethanol) and soft commodities.
He maintains that the supply/demand ratio is unlikely to change over the next few years due to the drivers, "a rising wealth in Chinese and Indian middle classes, demand for energy, demand for food and supplies issues".
Regarding sinking funds back into your business, Connolly cautions: "In a lower return environment and a changing world, you should think through the issues of diversifying risk away from 100% of your exposure in your own business".
Bernard Salt, KPMG partner and social demographer notes that not only has the number of billionaires throughout the world escalated rapidly over the past five to six years, a large percentage are now coming out of China, India and Russia whereas previously the majority came from Western Europe and North America. "A shift in geopolitical paradigms has opened up China and India and deregulated Russia allowed individuals to harness opportunities and be catapulted forward," he says.
"The driver to wealth was the change in a geopolitical structure, which led to a shift in thinking. When you have a shift in thinking at the upper most level of a country the way it is managed changed and so does its relationship with the rest of the world changes and that shift creates opportunities.
"A regulatory or political change at the upper most level will change the rules of business and people who read those rule changes early and position themselves well can be catapulted forward as a consequence.
"Eddie Groves (founder ABC Learning Centres) did that when he read the trend of working women and realised that what was required was a McDonalds of childcare.
"A shift in thinking about airline deregulation caused Richard Branson to pop up.
"Big picture shifts in the way things are done can come out of a political shift or a shift in government. The shift to Rudd after 10 years of Howard to Rudd will create some dramatic changes. Some people will read those changes better than others, position themselves accordingly and the rich list in Australia in 2015 will reflect this. "For example, if there is a change in thinking with regard to carbon tax in Australia there might be an opportunity for someone to harness an aspect of that.
"Alternatively at the 2020 Summit there were calls for hydrological surveys of Australia's north to evaluate land for agriculture. Someone will read the wind of change and act on it.
"It's about reading a political shift, backing your judgment and putting your neck on the line and waiting for the tide to lift to fortunes.
"The danger is that you read the shift, make your investments and the tide don't come."
