• Ideas

Is it Time to Bear-proof Your Portfolio?

The Australian economy has gone 27 years without a recession, making this current economic expansion the longest in modern history.

If you’ve been following the news, you may have seen the recent dip in both housing activity and house prices. You may also be wondering what this means for the macro economy…and for your portfolio.

In this article, we take a closer look at key indicators of the Australian economy. We also take a look back at historical data on sector performance in the time leading up to periods of economic contraction to help you put this information into context.      

Key Economic Indicators

Is the ‘wonder down under’ coming to an end? While there are risks on the horizon, economic growth should remain solid, if slower than previous years, in 2019. As households in Australia make up approximately 60% of the country’s GDP, the strength of the Australian consumer is a critical indicator of the broader economy.

Housing

House prices are falling, residential construction activity is decreasing and mortgage loan growth is slowing. However, these declines may be related to an inevitable housing correction given the price growth in recent years. In addition, the drought currently affecting significant portions of Australia’s interior may also be weighing on activity.    

Consumer Spending

Recently, consumer spending has been subdued, with both vehicle sales and domestic air travel in decline. However, the current levels of unemployment and wage growth are good indications that the economy remains strong today. With unemployment at only 5%—the lowest rate since December 2016—new jobs are being created and Australians are still working, spending and paying their bills. While wage growth has been decreasing since late 2012, the deceleration appears to have bottomed out, which is also a source of optimism for the economy.

Figure 1. Australia Wage Growth (%)

Source: Bloomberg, Morgan Stanley Wealth Management Research

A Historical Perspective

Understanding economic expansion and contraction patterns of the past can help forecast potential trends in the future and inform portfolio positioning. In a recent Morgan Stanley research report, we reviewed sector data back to 1973 and considered time periods one year before both Australian and US recessions to build a sample of returns. Our analysis shows that, when entering hard economic times, the sectors with the worst performance were Financials, Consumer Discretionary and Consumer Staples while the best performers were Healthcare, Materials and Utilities.

Keep in mind that sectors are themselves comprised of many different companies, each of which is influenced by different drivers. As a result, within sectors, it is crucial to look at key industry trends and company-specific factors as these could override historical relationships. 

Key Takeaway

In times of uncertainty, even the most seasoned investors can be prone to the pitfalls of behavioral finance and emotional decision-making. Business cycles expand and contract, and markets rise and fall. But, remember the ‘miracle economy’ of the past three decades weathered the 2008 global financial crisis and Australia remains some time away from an actual recession. But, if you’re thinking about shoring up your portfolio against a potential bear market, a wise course of action may be sticking to the time-honored strategies for managing risk: diversification and asset allocation (both strategic and tactical). Or, consider Warren Buffett’s bottom line fundamental advice: “Ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.”[2]

 

For more insight on strategies for managing risk, speak to your Morgan Stanley financial adviser or representative.  Plus, more Ideas from Morgan Stanley's thought leaders.

 

[1] Morgan Stanley Research. What Can You Remember from 27 Years Ago? January 30, 2019.    

[2] CNBC. Warren Buffett’s three ‘fundamentals of investing’. Available at https://www.cnbc.com/2014/02/24/warren-buffetts-three-fundamentals-of-investing.html.