Just how worrying is the ‘worry list’ for investors?

By Dr Shane Oliver, Chief Economist and Head of Investment Strategy for AMP Capital Investors

• There is a long 'worry list' being thrown up in regards to the outlook for shares and other growth oriented assets. The list includes: indebted consumers, inflation off the back of ballooning budget deficits and central banks pumping money, and worrying demographic trends.
• While most of these cannot be ignored, and some will probably constrain returns over the medium term in mainstream global sharemarkets such as the US, they are not as worrying as they appear.

In the past year we have had the worst financial crisis since the 1930s, one of the worst bear markets ever, the worst global recession since the 1930s and the biggest fiscal and monetary easing since World War II. Add to this less favourable demographic trends and it is possible to paint an endless list of problems. While it is wrong to ignore the risks, there is a danger in getting carried away. So, let's address the main concerns in turn: 'Reluctance by households to take on more debt and by banks to lend will prevent any economic recovery' This is the most common concern. However, there are several points to note.

Firstly, consumers do appear to be responding to fiscal stimulus and lower interest rates. In the US, retail sales have not collapsed despite the rise in unemployment, car sales are showing signs of recovering and consumer sentiment has started to improve. While a more cautious attitude towards debt will likely constrain the recovery in consumer spending, so far there is nothing to suggest consumers are just focused on debt reduction. In Europe and the UK, consumer confidence measures are on the rise since marking their lows in the March quarter. Even in New Zealand, consumer confidence has just risen to the highest level in 18 months and several housing market activity indicators improved significantly. These trends suggest that consumers have not lost the inclination to consume.

Secondly, some indicators, such as car sales and housing starts have fallen below the level consistent with underlying demand. This suggests that sooner or later there will be a spring back. In fact, the number of US new houses for sale has collapsed and housing starts at record lows may soon lead to a housing shortage if construction doesn't pick up soon.

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