Hudson's Investment Methodology
The Economic Cycle
Scroll down to read further information relating to The Economic Cycle.
The best way to learn about the workings of an economic cycle is to take a journey through a full cycle. We will begin this journey with the recession.
Historically, Australia has a recession every seven to nine years. The start of the recession is often characterised by high interest rates, growing unemployment, lack of consumer confidence and the failure of many businesses.
Fortunately, with gloom comes opportunity. Recessions force business to minimise wastage and improve efficiency and productivity.
Once the economy begins to improve (which it invariably does) companies quickly translate their productivity improvements into increased profits. Consequently, the share market begins to rise in value in line with improved company earnings.
This is the start of the share market cycle.
The Share Market Cycle
As a result of improved company performances, investors begin to regain confidence in the share market. This confidence accelerates the increase in the value of shares.
As the share market continues to rise, investors’ confidence in the market begins to outpace gains made due to good company performances. This is because of a number of factors, including increased investor savings, a buoyant economy and an overly optimistic view of the share market.
Eventually, the market reaches a point where the price paid for shares cannot be justified by asset backings or earnings. This forces a rapid reduction in the value of shares. This reduction is often known as a share market correction or, in extreme instances, share market crash.
A share market correction signals the start of the real estate cycle.
The Real Estate Cycle
As might be expected, share market corrections do little for investor confidence.
As the share market pitches restlessly, investors are quick to channel their savings into the security of bricks and mortar. Of course, a rapid increase in the demand for real estate results in a corresponding increase in property values.
Historically, the value of property rises by at least 25% per year throughout this period of the economic cycle.
Because property purchases are funded primarily by borrowings, a corresponding increase in demand for real estate causes an increased demand in borrowings (interest rates).
And because interest rates increase in line with the demand for real estate (as well as other factors such as inflation), the rapid growth of the real estate market cannot be sustained once interest rates make the cost of borrowing money too expensive.
However, unlike the share market, the property market stabilises at the close of the real estate cycle – rather than crashing.
This stabilisation in the value of real estate prices marks the beginning of the fixed interest (or cash) cycle.
The Fixed Interest Cycle
At this stage of the economic cycle, equity investment is not an exciting prospect for investors. The share market is doing little and interest rates are too high to make borrowing for a property an attractive investment.
Investors have little choice but to hold on to their current investments, or make the most of high interest rates and invest in debt (bonds, debentures and fixed interest).
High interest rates slow the economy and lead us towards another recession – the point where our journey began.
Find out more about our Hudson Membership - Unlimited Adviser contact and access to personal services for investing, finance, insurance, exclusive property investment opportunities, and more.
Ready to get started?
If you're new to Hudson Financial Planning, get started by booking a consultation and ask about a life changing membership. Or if you're already a member, you can request a consultation with your adviser. Ask us about our non member services -
- Fee for service with a Financial Planner
- Hudson Insurance
- Hudson Finance
We teach that anyone with some fundamental knowledge, basic skills and a little self-discipline can become wealthy - without taking unrealistic risks.
What our members say ...Thanks to everyone at Hudson Financial Planning for a pain free and smooth settlement. I spend a lot of time away from my home in Perth (between work and spending time with my family in Vietnam), in fact I have spent less than 30 nights at my home in Perth this year but with electronic communication, a PO box and a bit of good timing the whole process went without a hitch and everything was done in plenty of time. Thanks again to you and Matt for sorting out the loans and negotiating the discounted interest rates. Once again it has been a pleasure dealing with Hudson Financial Planning and should any of my family or friends need a hand with their finances I’ll be sure to recommend them to the Hudson Institute.