Capacity Constraints
by Phillip McGann, 11/01/2007

Can the share market continue to grow at rates in excess of 20% pa as we have seen over the past 4 years?  The obvious answer is not indefinitely.  The reason for this relates more to the underlying economy than to some “invisible ceiling” above which shares cannot trade. 

Physically shares will trade at whatever investors are willing to pay for them but the fundamental value of those shares over time will come down to how well their actual businesses perform within the context of the overall economy.

There is a limit to how fast a mature economy like Australia’s can grow before we see an outbreak of problems. These problems - evident in the Australian economy NOW are manifesting themselves in the form of constraints within the infrastructure of the economy – both physical and human.

We don’t have enough idle capacity to meet the surge in demand that is still present as we enter our 15th year of economic expansion. We see these shortages everyday in items as divergent as;

• The lack of capacity at our ports for the export of our commodities

• Lack of broadband connections (and speed)

• Inadequate transportation in our capital cities slowing economic trade

• And most obviously a lack of adequately trained and skilled workers in all manner of industry.

When these constraints occur in an economy they lead to a reduced limit at which an economy can grow and supply the goods and services the economy demands.  This slower economic “supply” when coupled with continuing strong “demand” then leads to a break out of inflation.

Inflation leads to higher interest rates, which is not good for the share market long term, causing investors to look at alternate areas to invest.

So will the share market grow by another 20% this year?  It could do, but if we don’t address these constraints in the economy we could be looking at slower growth (and this will lead to a lower share market in the longer term future), which is no good for any of us.