Where should we invest now? I recently met two unrelated investors moving their money into government bonds, gold bullion, other precious metals and natural resources. They believe these assets will best survive the economic collapse they expect soon.
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They expect a collapse because the US-China trade war is slowing manufacturing and exports, the European economy is weak, Brexit, the Hong Kong protests, and a trend away from free trade toward nationalism and protectionism.
They say ultra-low interest rates and quantitative easing (QE) in Europe have temporarily saved the Greek, Italian and Spanish governments from bankruptcy but will soon fail, spreading contagion in Europe and abroad.
QE involves central banks buying long-term government bonds and fixed interest securities with newly-minted currency. This boosts liquidity and has created surplus cash in the financial system.
Most analysts agree these are valid concerns but believe this view is far too pessimistic. Talks on the US-China trade war are continuing to move in the right direction as expected.
President Trump wants a resolution before his re-election attempt next year and to be able to claim victory during the campaign. China wants a resolution because it exports far more to the US than it imports from there, so it is most affected.
Some European governments have excessive debt but they use the euro. As they are only a small part of the euro-zone they won't cause the euro or the EU to fail.
Importantly the ultra-low interest rates around the world mean low-cost finance for all. Borrowing is cheap for consumers to spend, businesses to expand and governments to build infrastructure and create jobs.
The people and institutions who control the plentiful cash are seeking better returns than bank deposits. They are chasing properties, shares and businesses to earn them more. This will keep the values of those assets firm for some years yet.
The US economy, the world's largest, is strong. Retail sales and company profits are up. Manufacturing output is down this year in both the US and China due to the trade war, as are exports both ways. If the trade war is resolved output and trade will recover, boosting share markets.
Australian mineral exports will also benefit. Neither Brexit nor the Hong Kong protests are likely to have a major effect on the global economy.
We have neither boom times nor bad times at present. The past few years have been good for investors which can continue but probably at a slower pace. Returns should still be better beyond bank deposits.
