During my time of close relationship with the superannuation and funds management industries there have been four standout periods of distinct investment opportunity created by irrationality. The first was the mid-1980s, when major life companies offered industry super funds capital guaranteed investments at 16 per cent and 17 per cent a year, effectively gifting the reserves built up by past policy-holders. The second was the early 1990s when, following the collapse of the property market, it was possible to buy A-grade commercial properties on long-term leases to government tenants at rentals yielding 4 per cent or more above the 10-year bond rate.
The third was the “tech” boom, when the markets downgraded so-called “old economy” stocks (like BHP) in favour of IT start-ups at 100 times projected earnings (or sometimes projected revenues). The fourth period pregnant with promise is now upon us and I can do no better than repeat what I said in the June edition of Professional Planner under the headline “Real Professionals Love Bears”: “The other truly positive feature of the current environment, at least for those investors who have cash flow, is that they can sit on their hands and earn very strong real returns from cash while searching for the opportunities that these sorts of markets invariably flush out, often in the form of forced sales.”
It may be that Australia’s strong resource-based export earnings will shelter us from the US, and now European, downturn. It may even be that the US economy is closer to the bottom than I think. The numbers to watch are movements in total employment. If employment holds up we can have a gentle landing. If not, then real asset values will rapidly fall to match stockmarket falls (or worse). In either case, there is no hurry to be heroic.
