The Northern Territory news Wed 4 Nov 2020
The Northern Territory news; NewspaperNT
Community newspapers -- Northern Territory -- Darwin.; Australian newspapers -- Northern Territory -- Darwin.
News Corp Australia
Copyright. Made available by the publisher under licence.
News Corp Australia
WEDNESDAY NOVEMBER 4 2020 BUSINESS 35 V1 - NTNE01Z01MA Valuations have no meaning any more LAST weeks CPI report for the September quarter must have been very dispiriting for the honest toilers at the Reserve Bank. They have been cutting interest rates since November 2011 and this year embarked on one of the worlds biggest quantitative easing programs, yet underlying inflation is stuck at 1.2 per cent, half what they want. This week rates were cut again, along with making their quantitative easing the worlds largest a final, futile, throw of the dice. They might be telling each other its just the coronavirus, that itll be right when theres a vaccine, but in their hearts, they must know its not only that: in the past five years, trimmed mean underlying inflation has averaged 0.4 per cent per quarter; in the five years before that, 0.6 per cent; and in the five years before that 0.8 per cent. It has been a long, inexorable decline. Of course, this years sharp recession and unemployment hasnt helped, even though aggregate income has increased because of government transfers and has been saved, not spent. Reserve Bank governor Philip Lowe was forced to announce something yesterday he said he wouldnt do: take the official cash rate below 0.25 per cent, which he said was equivalent to zero in Australia. But it will be little more than symbolic. The market cash rate is already near enough to 0.1 per cent because of the liquidity the RBA has been flooding the system with, deliberately using cash as the rate cut you have before you have a rate cut. Inflation has been declining because of the deflationary impact of technology, digitisation and disruption. The volume and price of money might once have been effective in moving consumer prices, but not any more. And the refusal of central banks to just roll with inflation thats lower than their made-up target has led to unprecedented distortions: global debt is now more than three times GDP and financial assets five times. This is not an accident: debt and asset prices are the central banks tools of trade. Its by inflating these that they hope to achieve their goal of 2 per cent inflation. The most obvious result of this, coupled with the digital revolution, is that the sharemarket is in chaos, where no one knows how to value companies any more. Price/earnings ratios are no longer any help in sensibly valuing the technology companies that are driving the market, mainly because most of them dont have any earnings yet, or if they do they are deliberately held down by investing for growth. And that includes the miners digging for battery minerals. Most of the technology and battery metals CEOs I speak to explain that they could make a profit if they wanted to, but are too busy grabbing market share. The companies that are growing dont make a profit, and the companies that make a profit arent growing, and in fact they are mostly going backwards right now because of the coronavirus recession, so the profit forecasts are not only down, theyre rubbish. In any case, a price-earnings ratio, the traditional valuation tool, only describes the short term next year while the paradox of the technology stocks is that while they may be the playthings of speculators, their marginal pricing is being set by longterm professional investors who are taking a 10-year view, or longer. So fund managers are increasingly using discounted cash flow (DCF) to value stocks, since PE and price to enterprise value simply dont capture the long-term nature of what they are doing and certainly doesnt capture the growth that they can clearly see. In fact, some fund managers are giving up on valuation itself. Mark Schmehl, portfolio manager at Fidelity Investments, said last week: Valuation, I find, is a useless tool. If you base your investment decisions on valuation, you are never going to make money. Its true that the long-term cash flow forecasts required for a DCF calculation are no more than an educated guess, and then theres the problem of deciding on a discount rate when the long-term bond rate is under 1 per cent. Normally youd stick an equity risk premium (of 3-6 per cent) on the bond yield (which used to be 5 per cent) and theres your percentage number for discounting future cashflows to the present. But that doesnt work any more because inflation is so low as a direct result of the activities of the very digital businesses that the fund managers are trying to value. Monik Kotecha of Insync Funds Management, a Sydney-based investor in global technology and disruption stocks, told me last week he uses a discount rate of 9-10 per cent, which is very conservative, implying a huge equity risk premium of 9 per cent. Yet he is fully invested and finding no shortage of things to buy because the growth in future cashflows that he can see for the companies that are disrupting the existing order is so phenomenal that a 10 per cent discount rate still leaves plenty of them looking cheap at current prices. Many fund managers are going with normal discount rates of half that, which can make even the bubbliest of stocks look cheap. So the world is in the grip of a vicious or virtuous circle, and we wont know which it is until after the bubble bursts or doesnt. Technological disruption is leading to persistent low inflation, which is leading to zero interest rates, which are leading to inflated asset values and debt. In the meantime, the result is decidedly unvirtuous, and potentially vicious: record debt, inequality and disgruntlement. Alan Kohler is the editor in chief of Eureka Report. INSIGHT ALAN KOHLER Reserve Bank of Australia governor Philip Lowe has cut the official cash rate below 0.25 per cent. Picture: AAP Image
Aboriginal and Torres Strait Islander people are advised that this website may contain the names, voices and images of people who have died, as well as other culturally sensitive content. Please be aware that some collection items may use outdated phrases or words which reflect the attitude of the creator at the time, and are now considered offensive.
We use temporary cookies on this site to provide functionality.
You are welcome to provide further information or feedback about this item by emailing TerritoryStories@nt.gov.au