24 Jul 2019

Where to now for Australia?

It’s been just over two months since the Scott Morrison led Liberal party, in conjunction with their Coalition partners were returned to office.

Since the election, we’ve seen much change in financial markets, the most notable of which has been the two interest rate cuts by the Reserve Bank of Australia (RBA), who have now brought the cash rate down to just 1%, a new all-time low.

Equity markets have had a minor rally, up 3% since the election result, whilst the dollar has been fairly flat, still trading near USD $0.70.

But the biggest news has been in the property market, where a number of developments have helped stabilise prices, after over a year of price falls which saw Sydney and Melbourne prices lose over 10% of their value.

These developments have included

  • First Home Loan Deposit Scheme: The Federal Government will help up to 10,000 Australians a year buy their first home, by providing a government guarantee on 15% of their home loan
  • APRA changing interest rate buffers: In the past, APRA made the banks calculate whether or not they thought borrowers would be able to repay loans if the interest rate on their mortgage was 7%. Now APRA is letting the banks set their own interest rate buffers, which in theory means they’ll able to lend more money to people.

On top of the cuts to interest rates, and the removal of uncertainty regarding changes to negative gearing and capital gains tax, these developments have helped stabilise property prices. It has also seen a notable uptick in auction clearance rates across the country, which you can see in the chart below.Weekly clearance rate, combined capital cities

The stabilisation in prices and uptick in auction rates has led some commentators to forecast a return to boom times. We are not so sure at all, as we see a number of warning signs highlighting how uncertain the economy is, and how stretched households are.

Business Spending Plateaus!

The Commonwealth Bank Business Sales Indicator (BSI) saw its weakest monthly growth rate in over two years. Spending growth has decelerated for four consecutive months, which you can see in the chart below.

Sales lose momentum

Source: CBA

Interestingly, spending on entertainment, and on automobiles continues to weaken, which really highlights how cautious the consumer is.

Consumer Confidence Weak

The latest The Westpac–Melbourne Institute Consumer Sentiment Index declined 4% over the three months to July, taking the Index to 96.5, a two-year low.

Consumar sentiment: a two year low

* thin dotted lines show ± 1 standard deviation
Sources: Melbourne Institute, Westpac Economics

Of particular concern is the fact that households appear most worried about the outlook for their finances.

Debt Levels Are Still Really High!

Lost in all the excitement about the “recovery” in the housing market is a realisation that household debt levels in Australia are still incredibly high. Since the beginning of the housing boom, which in reality dates back to the start of the 1990s, Australian household debt to income ratios have grown from approximately 70% to 190%, as you can see in the chart below.

It is beyond unrealistic to think this can continue to rise in perpetuity, and with little left in the way of additional borrowing power, we believe it’s unrealistic to expect house prices to do anything other than track income growth in the years ahead.

Global household debt to income rations

Sources: national sources; OECD; RBA

That’s the best case scenario for property bulls, and it’s a view that appears to be shared by AMP Chief Economist Shane Oliver, who recently stated; “There’s a bunch of positive factors supporting the property market but I don’t think prices are going to run away because lending standards are a lot tighter this time around. This is not 2011/12 when banks were happy to lend to virtually anyone. I also think unemployment is going to rise so I think that’s also going to put a cap on prices. The increase in demand has pushed up clearance rates on still relatively low volumes, which begs the question as to whether it’s sustainable”.

What does this Mean for Rare Coloured Diamonds?

We think there are three key takeaways for Australian Investors when looking at the rare coloured diamond market, and how it’s likely to be impacted by developments in the Australian economy and housing market.

  • Whilst property prices might stabilise, it is highly unlikely that there will be another property boom, with billions of dollars chasing the market higher. This means that investors wanting to generate profits in their portfolio will need to look elsewhere, and we fully expect some of that capital to be directed toward the rare coloured diamond market.
  • Bond yields continue to tell us that we are likely to be in a low interest rate environment for at least a decade if not longer, with the real return on cash and term deposits likely to be negative during this time period. This is going to encourage investors to move out of cash like investments and into hard assets, which will be bullish for rare coloured diamond prices.
  • The likelihood of an Australian recession, or at least a continuation of the current per capita recession is very real, which will continue to put downward pressure on the Australian dollar. Astute investors will want to have some of their portfolio invested in non-Australian dollar denominated assets, and rare coloured diamonds are one way of achieving that.

Couple these factors with the supply side constraints facing the rare coloured diamond market, and the organic demand growth we are seeing around the world, particularly in Asia, we remain confident of the profitable opportunities within the rare coloured diamond markets, with these assets playing a unique role in a long-term investment portfolio.

ADP at the Australian Investors’ Association Conference 2019

Next week, Australian Diamond Portfolio is heading to the Gold Coast, to participate in the Australian Investors’ Association National Conference. The conference will bring together hundreds of investors from around the country, including SMSF trustees, to hear the latest insights from economists and fund managers on the outlook for the economy and investment markets.

The title to the conference itself; “Investing Beyond the Boom” is highly appropriate in terms of the case for investment in rare coloured diamonds. Share markets, property markets and bond markets are all facing serious headwinds in the years ahead, whilst cash in the bank is dying. Investors need to look outside the box, with the next 10 years likely to be a great time to invest in in alternative assets.

We will provide a detailed report on the conference within the next fortnight.

In the meantime, if you would like to know more about investing in rare coloured diamonds, or have any questions about this article, please get in touch.

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