Long-term investors in the stock market should be praying for a rate rise from the US Federal Reserve next week – and that’s despite the fact that some of their stocks will take a beating if it does.
That might sound a bit illogical at first, but note I’m referring to ‘long-term investors’, not ‘speculators’.
The markets, including the ASX, are in turmoil right now because of speculators rapidly shifting positions – from pumping up stocks, to short-selling them, to fleeing into bonds, fixed interest and even cash.
This rollercoaster is driven in part by the looming decision to end an extraordinary period of low interest rates in the US, but also uncertainty about future growth prospects in China and Europe.
So why would a rate rise be a good thing? Well, the fact is that even a small rise will send a powerful message to hedge funds and investment banks that easy speculative profits are over and push them into divesting or holding for the longer term.
Removing one of the three big sources of instability will help calm markets – eventually. First there is likely to be a short period of panic, and some global capital flows that can’t be easily predicted.
That said, most commentators are expecting capital to be pulled back from emerging markets and commodity-based economies such as Australia, and to wash back to US shores. But there will still be unexpected storms along the way.
The net effect in Australia could be severe, but it really is better to know sooner rather than later.
As I have written previously, there is a disconnect at present between what kinds of reforms voters will accept from political leaders, and what is needed.
The reforms Australia needs to stay competitive in the global economy are major, but they will not happen until everyday Australians realise just how good we had it during the mining boom decade – and how hard we will have it in years ahead.
The government’s planned competition reforms, for instance, were a chance to turbo-charge the small-business sector as the engine of jobs growth.
But while the national debate remains stuck in the “she’ll be right” attitude of the halcyon days, nobody seems to care much when such reforms are seen off behind closed doors by pressure from corporate Australia.
In that sense, a US-precipitated rout on the ASX is just what’s called for. Not only will it allow genuine long-term investors to buy back into companies that actually have a future, and at sensible prices, but it will send a clear signal to the electorate that tough reforms are not just a thought-bubble, but are essential.
That’s not to say households are totally complacent. Already they are waking up to wages growth rates at record lows. The buying power of the Australian dollar is falling month after month, and part-time jobs are being created at twice the rate of full-time jobs.
All of those household-level indicators are set against more abstract bad news stories – low commodity prices, a dramatic fall in resources investments and the low Aussie dollar.
In such an environment, many Australian firms face bleak results in the next few years – meaning they will struggle to pay customarily high dividends. That in turn will produce lower share prices in previously booming sectors such as banking and resources.
If you try to view this landscape from the view of a fund manager who sincerely wants to produce long-term capital growth for their clients – especially superannuation savers who will need that money in 30 years’ time – it’s easy to see why the speculative jumps and dives of ASX stock prices are a distraction at best, and severely misleading at worst.
Australian prosperity is best served by a return to relative market calm, and more realistic share prices across some of the hot stocks the are currently jumping up and down with the global trading frenzy.
A US rate rise is the start of that calming process. It’s the shock we need to turn our attention away from the casino run by global financial sharks, and back to the boring, yet rewarding, fundamentals of long-term investments.