Investment cycles
Every investor needs to be aware that all investment markets are interrelated, like a big financial jigsaw puzzle. We will examine these relationships later on in this chapter, but first it is important to understand the impact that the business (also called the economic) cycle will have on investment returns.
It is generally accepted by economists that the health of any country’s economy is measured by an economic indicator known as gross domestic product (GDP). Put simply, GDP is the value of all the goods and services that are produced by a country. In Australia, this data is compiled and released quarterly by the Australian Bureau of Statistics (ABS).
If a country produces more and more goods, GDP grows and the quarterly trend is up. As the trend in GDP rises, it can be concluded that the economy is getting stronger — businesses are likely to be making profits; unemployment is likely to be low; consumer confidence is likely to be high and consumers are increasing the amount and value of the products they are purchasing. Business confidence and investment is also likely to be high. Investors in turn are also confident that economic growth will continue, and so they continue to invest in growth assets, such as property or shares, in search of higher returns.
The opposite is true when the trend in GDP starts to decline. A decline implies that there is a slowdown ...
