In a recent interview, UNSW Business School professor Richard Holden said figures released by the Australian Bureau of Statistics show “we’ve now entered an effective recession in Australia.”
As he explained it, GDP per capita shrunk in both Q3 and Q4 of 2018. “Two quarters of negative growth,” he said, “[is] a recession on a per capita basis, and the figures show a large part of that is consumer spending, growing at only 0.4 per cent in Q4. It’s a huge slice of the economy at almost 60 per cent of GDP, but it has stalled.”
He added: “Given the level of unemployment in Australia, how wages growth is persistently weak, and stubbornly low inflation, the economy should be roaring along. It’s not. This gives us further evidence that secular stagnation has hit Australia.”
So, if a recession is finally happening, what will it mean for your clients?
Property
A typical result of a recession is a drop in house prices. As we recently discussed, the Australian housing market experienced its worst quarter-on-quarter decline since the December quarter of 2008.
According to latest ATO SMSF statistics, over $100 billion of the $755 billion in the SMSF sector is invested in residential and non-residential property. Of the larger super funds regulated by APRA, around $148 billion is invested in property. It stands to reason, then that property valuations could have a tangible impact on fund performance over the medium-term.
Shares
Share prices tend to fall along with property in a recession, and as equities tend to comprise the bulk of a super fund’s investments – $819 billion as at December 2018, although this was down from $841 billion a year earlier – an economic downturn will also likely impact performance.
Looking at the flipside, though, such a scenario could also be considered a buyer’s market. Last week, we discussed how a CommSec report revealed many investors have reacted to market downturns by buying quality stocks “that are often thought of as expensive, but which have been caught up in the general downturn.” This was reflected in the trend of investors moving away from the top 20 ASX stocks starting to slow over the period.
Is it time for your clients to follow suit?
Read more: Fixed income – a solution for difficult times?
The dangers of fear
Finally, one of the biggest dangers for investors in a recession is the natural instinct to get out while the going’s good – or, rather, appears to be good. Many who did so during the GFC crystallised their losses, while those who stayed the course eventually recovered.
Given this, the need for quality financial advice is higher than ever, and those advisers who can reach out into the community have a perfect opportunity to demonstrate their value.
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