I thought it was worth communicating some information that recently caught my eye, and I think does a great job of putting the Australian Share Market into perspective.
While the mainstream media is quick to portray a grim picture of the financial landscape, when we take a look at the actual statistics, the outlook is not all ‘doom and gloom’.
This graph breaks down the returns from Australian shares over recent time periods:
What this shows us is that in the last 40 years, there has been very little change at all in dividends and earnings growth by Australian companies. The one thing that have a significant changed is and inflation. In fact, the contribution to returns from Inflation has significantly dropped. Over the last 20 years, the total return from share have been 2% lower, and this has been mainly due to low inflation being almost 50% lower.
With the RBA having recently moved the overnight cash rate to a record low of 1.75%, and with 10-year Australian bond yields being at 100 year lows (2.22%) – inflation is likely to remain low for some time.
WHAT DOES LOW INFLATION REALLY MEAN?
To use a less ‘financial’ example, let’s look at groceries – bread and milk. In the early 80’s, when inflation was much higher than today, we saw regular and significant price rises. From 1980 to 1985, the price of a loaf of bread in Brisbane went from 56 cents to 85 cents. That is an increase of 51%! Milk was similar. The price of a litre of milk went from 56 cents to 88 cents. That is a 57% price rise over 5 years!
Fast-forward to today and (despite our habitual grumblings on price rises) over the last five years, the humble loaf of bread has fallen in price by 6%, and milk prices have actually dropped by 11%.
Of course, the prices of some items, like electricity and Private Health Insurance, have been rising more than others. However, for a lot of consumables like petrol, food, and clothing, we have been enjoying a fairly benign low inflationary environment.
SO WHAT DOES IT MEAN FOR INVESTORS?
In a nutshell – it means that even though the return on our investments may be slightly lower, because inflation is much lower than historically, the end outcome may not be significantly different for investors.
DOES THIS MEAN THAT WE SHOULD STOP INVESTING IN SHARES?
When you consider that despite the return on cash and bonds being at record lows (1-2%), we can still get average dividend yields of 4.5% from Australian shares. This makes the share market a very attractive option, where the objective is to generate income.
It’s important to note one other thing that will never change… the share market has a tendency to panic in response to economic news! Even though over the course of a year the share market, on
average, may only rise a few percent, the daily movements are often more dramatic. We often see reports of up to 1% movements as the market digests any good or bad news. So although the share market can be volatile over the short term, over the long term the Australian share market hasn’t been such a bumpy ride. It does however highlight the importance of having a well-balanced share portfolio.
In Australia, we have been lucky enough to avoid a lot of the economic turmoil that has plagued other markets around the world. The main change we have seen in the share market is primarily due to low inflation. So maybe we just need to adjust our expectations and look at the positives? With low inflation, we also the benefits of fewer price rises, cheap cash rates for borrowing, and still get the benefits of good dividends from Australian shares. As always, when we look at the big picture, we get a much clearer view.
If you have any questions or comments please let me know. We are always happy to help.