GDP's shock contraction - how your investments are affected
GDP's shock contraction - how your investments are affected: not much.
The big news of the week was the announcement of the fall in Australia's GDP in the September quarter - by 0.5%. Worse-than-expected. By a lot. Expectations (depending on who you talk to) were for a contraction of around 0.1%.
Your investment team really doesn't like to comment on economic matters - instead focusing on investing, and in particular the companies in which you are invested in (more on this below). That said, there are a couple of, what we consider to be, salient points which we think might be of interest.
First, GDP figures are backward looking. Investors, and markets, are mostly forward looking.
Second, this is one quarter. The data that rolls up to form the GDP figure can be quite volatile on a quarterly basis - which was clearly the case when the underlying data inputs are considered.
Third, Australia has had a really unusual run of 21 quarters of growth. This is unusual in that the economy works in cycles. We normally expect to see ups and downs in the quarterly GDP data (and other economic data).
Gross Domestic Product (Source: ABS)
The quarter contraction means that yearly trend GDP is now 1.8%. And this is perhaps where the real focus should be. GDP growth of 2 to 3% is widely considered healthy for the economy - the Goldilocks principle. Everything from taxes to government, the unemployment rate, to company revenue take, will be generally lower than ideal in a systemically lower growth economy. And this is what we are increasingly seeing - 2 to 3% is not realistic, and doesn't look realistic in the short to medium term.
This is what we are mindful of in relation to the companies we invest in.
What it means for your equity investments
The quarter's GDP decline shouldn't adversely affect your investments. We like to invest in companies with the ability to make their own way in the world - with profit not significantly influenced by factors outside their control.
As an example, Paragon Care is exposed to the positive health care / aging population theme, and is also acting to consolidate a highly fragmented market and thereby grow its size, revenue and profit. Lower GDP will not have a meaningful impact on Paragon Care.
It should be noted that there are degrees to which not being subject to outside influence is possible. Sometimes a conscious decision is made to have increased exposure to, for instance, regulatory risk - because the overall investment case is strong (e.g. Primary Health Care).
Examples of companies with a higher correlation to GDP include Woolworths, and the banks. We are cautious on these names for other reasons, and the lower outlook for GDP increases this caution.