What does the poor start to the year mean for me?
Earlier this week, we received an email from Richard, one of our BWG clients.
Happy New Year to you and the family.
There seems to be a lot of negative economic news and predictions around at the moment with the poor start to the year, is there anything we should be doing or actions to take to avoid or lessen any potential impact if things were to turn very ugly?
Our reply was the following, and it was also the inspiration for this blog article.
To a degree, we had felt that the changing outlook and asset price risk was coming which is why we did the sensitivity analysis work for you over the last couple of years. We also discussed those scenarios to test if you could deal with the impact, both emotionally and financially.
The Economic Weakness blog article from April last year was prior to the nervousness in the markets but does indicate our concern at that point, and our Stock Market Crash and Perth Property blog article from September discusses the greater visibility of these concerns in the markets and WA.
It’s for these reasons we didn’t recommend you purchase more investment properties, or borrow extensively to invest in the stock market into what were both very cashflow positive investments when the times still felt good.
However I think it is a great opportunity to catch up and discuss your thoughts and how your positioned so when would suit.
The negativity for 2016.
There has been a lot of negative press to start the year of 2016. More falls on the world share markets, more redundancies for Western Australia families, deep falls in the prices for oil, gas, Iron Ore and the Australian dollar. It looks like a number of the smaller Iron Ore mines are months from closing the door and we don’t know when or where those people will find work.
The media are also discussing the possibility of another global financial crisis, and the following statistics are the key reasons to support this argument:
- Australian households are the highest indebted population in the world,
- Australia’s total debt level (Government, Corporate, Household) is second only to that of China (when measured relative to GDP).
- Most major economies have far greater levels of debt now than they had in 2007 when the GFC struck, meaning less capacity to stimulate their economies now than during the GFC.
However, its important to note that these predictions have been around ever since the last GFC, and since then fortunes have been made.
The statistics also indicate that the valuations of the US share markets and property markets in Australia, China, Canada, & New Zealand are quite overpriced compared to historical averages. High asset prices, coupled with low confidence, are a recipe for collapsing prices.
What the future holds.
If all this plays out, it is likely to affect our super fund balances and properties, as well as salary and wage outlook, job security, and our comfort levels.
Western Australia was somewhat protected from the 2007-2008 global financial crisis due to the huge stimulus from the construction boom for the mining and resource industry, which is only just slowing down now. During that time, we didn’t experience our house prices dropping by 50% or more like they did in the US, Ireland & Spain and most of us had rising household income as we received pay rises, bonuses and promotions.
If there is a financial crisis again, Western Australia may feel it more than the other states and other western countries because of the positioning of our local economy, state government finances and the continued slowing resource and construction boom.
For a more detailed discussions, you can read:
- Our September blog Stock markets crash and Perth property hits the wall.
- Or this recent blog from Instreet, which we found to be a balanced and succinct discussion on the impact of the oil price and China concerns on sentiment.
There are certainly real risks for us all but as always, our personal circumstances determine the appropriate strategy.
What else can be done?
In addition to reviewing your investment strategy, we also recommend the following:
- Our experience in advising clients through the GFC showed very different outcomes between those who do not modify their spending behaviour and those who did cut that nonessential spending. Channelling surplus money to debt repayment or investment into the discounted investments available set them well ahead.
- So we do believe it is time for some to hold off on larger or discretionary lifestyle expenditures or certainly discuss them again prior to proceeding. Holding off doesn’t mean it can’t happen. It just avoids regrets.
- It is also the time to ensure that personal cash flow buffers are built-up.
- Ensuring there is a survival plan in the event of redundancy or lack of work is also prudent and brings piece of mind
So what are the positives?
Fortunately we feel that most of our clients are positioned to not only survive a prolonged period of economic and investment market weakness, but also to also take advantage of the depressed asset prices, so that in the future they can feel that they made the most of the opportunities.
We are excited about the opportunities that 2016 presents for our clients, despite the terrible social impact of the circumstances washing through WA at the moment.
Many of us still have assets we wish to buy, such as house upgrades, holiday homes, investment properties and of course a bigger boat. These are now cheaper and may become cheaper still.
It was a tough time to be an advisor and investor in the 2008 global financial crisis. However, Mike regularly said that it would be the best thing that happened to the majority of the clients as it provided the opportunity to buy wonderful investments at discounted prices. Some of those clients have retired off the opportunities taken during that time.
Timing and careful selection is paramount however. Our recent case study is about one such family who was fortunate to be referred to us when these opportunities presented and you can read here how we helped one couple build and execute a Karratha Escape Plan.
Continued support and guidance.
If you have concerns about anything discussed here or concerns about your personal financial position, please contact us or call (08) 9274 2888. It’s a great opportunity to get together and talk about your situation again, and the discover your opportunities and options.
If you know people who do have concerns or might be questioning if their financial strategy is optimal, we do have capacity. We welcome the referral.
Helping people position for the opportunities that will present through this major readjustment for WA is hugely rewarding work for us.