Market Wrap: The Good Debt, the Bad & the Ugly

The Good Debt, the Bad & the Ugly

By Dale Gillham, Chief Investment Analyst at Wealth Within

Australian’s are well ahead of our US counterparts when it comes to good versus bad debt, but are we well prepared to manage the risks?

The majority of household debt in Australia is actually good debt. In 2016 it was reported that around 56 per cent of the debt was related to homes and land, while 36 per cent was associated with investments. Therefore, around 93 per cent of borrowings are used to create wealth, which is well ahead of Americans at around 74 per cent.

Australia’s net worth after liabilities reached $9.4 trillion dollars at the end of 2016 and the level of debt to the value of assets is only around 20 per cent. But according to economists, it’s not all roses, as our debt is growing faster than our income and as a nation, household debt outstrips our country’s Gross Domestic Product (GDP), which represents the value of finished goods and services we produce during a particular period. Exacerbating the numbers, GDP fell by around 23 per cent from 2013 to 2016, which was impacted by the commodities slump, whilst household debt rose. This will change over time as commodities improve.

It has been reported that people are moving into ‘mortgage stress’, as they struggle to make repayments. I believe that many Australians don’t have a good knowledge or understanding of the risks and how to avoid getting into trouble if asset values fall. Therefore, whether you invest in property or shares, it’s important to consider the ‘what-if’ scenarios and your options in the event something goes wrong, such as a loss of income, or a fall in asset values.

What do we expect in the market?

Last month it appeared that the market had chosen a direction, although not with any real conviction. However, at the time of writing the bears still hadn’t taken full control as the All Ordinaries Index (XAO) jumped back above 5,760 points.

Whilst the chart indicates that the market isn’t in decline yet, we cannot assume that the market will rise from here as it could just as quickly reverse again to fall away.

This lack of clear direction since January 2017 is frustrating for traders waiting for direction to be confirmed. From time to time, there is uncertainty about the Australian economy, but we haven’t seen the market respond quite this way, therefore I believe the increase of computer-controlled algorithmic trading is likely to be having an impact on what is unfolding in the market.

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