The Full Cycle

Iran is once again calling for some form of resolution, and to us that signals the economic and social strain from US sanctions and other measures is starting to bite. It is worth watching closely. A government that is negotiating from weakness behaves differently to one negotiating from strength, and markets tend to notice the difference before headlines catch up.

At home, the housing downturn is gathering pace. Prices fell in 93% of capital city suburbs last month, with Sydney, Melbourne and Canberra recording the biggest drops. The RBA's rate hikes, combined with the government's decision to restrict negative gearing and lift capital gains tax, are the main drivers. It is getting harder to find a credible case for a near-term turnaround, and housing values are expected to keep falling, particularly if the Reserve Bank lifts rates again, which looks likely. This may well be the start of a longer decline, and the pressure on leveraged property investors is only going to build.

China's trade position is also under pressure. US Treasury Secretary Scott Bessent has argued China's US$1.4 trillion trade surplus cannot continue. There is a real fairness question buried in that: China's domestic auto market is declining while its auto exports are booming, and that combination is squeezing European car makers, an industry Europe will not sit back and watch decline. Job losses in European manufacturing tend to translate quickly into political and social disharmony, which is exactly the kind of pressure that forces a policy response.

We understand how markets work, so we raised the alarm on private credit a while ago. It appears ASIC now agrees. Better late than never. ASIC Chair Sarah Court told a Sydney gathering this week that the regulator is closely scrutinising a sector that remains far more lightly regulated than banking.

Most adult Australians have exposure to private credit through their superannuation, whether they realise it or not, and Court was blunt about why that matters: this is not a peripheral issue, it involves people's retirement savings directly. RBA Governor Michele Bullock echoed the concern from the central bank's side.

The trigger is the collapse of major NSW developer Bathla Group, which entered administration this week owing more than $3.5 billion. Around 40 private credit funds are exposed to Bathla, with individual exposures ranging from $1.5 million up to $340 million. CVS Lane, a lender with nine separate loans to Bathla across its $2.1 billion in funds under management, has now suspended investor redemptions while it works through the fallout. It joins MA Financial, which capped redemptions at 1% of funds under management per month earlier in the week, citing both the Bathla exposure and uncertainty around proposed federal budget tax changes.

This will have consequences well beyond the funds directly involved, particularly for property markets, since a large share of private credit is tied up in property development lending. When redemptions get suspended, it does not just trap the money of investors in that fund, it makes every other private credit investor in the country ask the same question about their own fund.

We also flagged immigration a while back, and public awareness of the issue is clearly rising. This week's Secret Harbour by-election in Western Australia saw a 17.7% swing away from Labor, with One Nation winning its first lower house seat in the state on a primary vote that more than doubled. We are not reading that as a single-issue result, but cost of living and immigration pressure both featured heavily in the campaign, and the government will now be under real pressure to respond, which only raises the issue's profile further. From an investment standpoint, a genuine reduction in immigration numbers could cut two ways: it may force businesses to invest in productivity to offset a smaller labour pool, or it may simply push wages higher and compress margins and shareholder returns. Which one dominates will matter a great deal for equity returns over the next few years.

Since the March 2009 low, the US market has returned around 521% in real terms. That is an impressive run, and not surprising once you look at the full sweep of market history. But it is not what an investor actually receives, because a bull market on its own is only half the story. You have to look at the full cycle, bull and bear together, to see the real number. Below is $1,000 taken through each complete secular cycle since 1877. This excludes dividends, so actual returns would be somewhat higher, but that is little consolation once you see the damage a bear market does to a big preceding gain.

Looked at this way, full-cycle returns are nowhere near as impressive as the bull-market-only headline suggests. Losses compound just as gains do, and volatility drag is punishing: a 50% loss needs a subsequent 100% gain just to get back to even. At the long-run average return of around 8% a year, that is roughly 12.5 years spent simply recovering ground already lost. The maths gets worse the bigger the preceding gain. A 60% loss following a 333% gain does not just erase a third of the gain, it wipes out around 200 percentage points of it.

We will continue to update the sector scorecards, momentum indicators and macro notes as these themes unfold. If conditions shift, you will see it reflected in the Wells calls, Signals and Noise Premium updates and portfolio insights.