The new normal

Written Nov 2021

As I write this in late November most Australian states are emerging from lockdowns. When it was announced that the eight week NSW lockdown would end I rejoiced and said to a friend: ‘It will be great to get back to normal again’. His reply was: ‘So what’s normal?’

This caused me to wonder what the future will be like and how the sharemarket could be affected.

Consider the following:

Wearing masks, proof of vaccination, signing in and out – hopefully these restrictions won’t be necessary in the future. However, it’s not clear to me what the rules will be for those who aren’t fully vaccinated.

Working from home – the lockdowns made it necessary for many office workers to work from home. Employers embraced this change as working from home has many benefits for them, their staff and also the environment. It seems likely that flexible working where many employees split work between home and office may become the new norm for many businesses.

Overseas travel  – With overseas travel off the table and even restrictions on interstate movements, the travel industry has been badly affected. As Covid restrictions are lifted throughout Australia, interstate travel should be restored to former levels. However, there’s no real indication if and when overseas travel from or to Australia will reach pre-Covid levels again. This has severely impacted immigration and the inflow of foreign students and workers. Possibly overseas travel could be off the table indefinitely for countries that can’t get on top of Covid infections or with low vaccination rates.

Online purchasing – There’s been a huge growth in online purchasing which has been great for companies that have embraced the technology as well for as for couriers and delivery services.

 Labour supply – Rather strangely, on emergence from lockdown many businesses struggled to rebuild their labour force. The labour shortage – particularly in the availability of foreign workers has adversely affected the harvesting of agricultural products.

Business closures and shortage of products – Covid restrictions caused many businesses to fold and consequently many products have been in short supply. It seems unlikely that this will be a permanent change as businesses reopen or reinvent themselves and new businesses start up.

Wages  – It seems logical that a shortage of labour would result in wage increases and this is now starting to occur. I believe wage increases to keep pace with inflation at least will become the norm again.

Inflation – Inflation fell as the Covid epidemic took hold and even became negative in Australia. However inflation is on the rise again and I have no doubt that the government target of around 3% will be re-established.

Interest rates –  Interest rates directly affect the entire economy and particularly loan repayments for both homeowners and businesses. Interest rates have been at an historical low for some years now but there’s no doubt in my mind that rates will rise again – the only question is when and by how much? I doubt that there will be a steep rise; rather I feel rates will gradually creep up over a longish period.

Savings growth and consumer demand – The money previously spent on travel has been stockpiled so Australian savings are at an all time high. This resulted in an unprecedented demand for many products – especially big-spend items such as cars, caravans, boats, furniture and electronic devices as well as labour and materials needed for house renovating.

House prices – House prices in Australia have defied gravity – you would think that during the epidemic they would have fallen but instead they continued to rise as buyer demand outpaced supply. But there are indications that the growth will slow down as banks increase restrictions on loan requirements and interest rate rises put the brakes on buyers.

China – Because China is our major trading partner it’s important to keep tabs on the Chinese economy. China is something of an enigma but there are clear signs that the boom in the Chinese economy is faltering. This will affect demand for many Australian products, particularly coal and iron ore.

Renewable energy – In the years ahead many changes will occur but I won’t discuss these here but make this the topic of a future post.

Shares

Our sharemarket threw off the Covid blues more quickly than expected but over the last few months has been rather directionless and has underperformed the US market. With interest rates at an all time low and unlikely to rise a great deal for some years it’s a no-brainer to invest in shares rather than interest-bearing accounts.

In these uncertain times especially with the emergence of the Omicron mutation it’s difficult to foresee how shares will be affected. My suggestions for Australian share investors are:

• Be extra cautious with your share trading until some of the uncertainties I’ve mentioned show a more definite trend and the market settles down with less volatility.
• Invest in quality shares that are likely to keep on keeping on despite the economic gyrations.
• If you can’t beat them join them, so consider investing a proportion of your funds overseas. You can do this easily by buying shares in a listed investment company (LIC) or exchange traded fund (ETF) that invests in companies outside Australia. Remember that it’s always a good strategy to diversify your share investments.