Majella Newsletter

Market update

In the past few months, we have seen markets rise and then fall back through their November lows only to bounce back strongly again. The S&P 500 is now higher than it was in mid November having recently risen 19% from the 9 March 2009 low.

Australian and US share market returns since 20 Nov low

However, world economic growth continues to fall and unemployment rates rise. Governments continue to try to shore up their economies with cash. We have even seen the UK and US Governments make the drastic decision to print money as they no longer have the ability to stimulate the economy with lower short term interest rates.

The stability of the global banking system is still very concerning. Many US, European and UK banks are in trouble and requiring Government bail-outs. In general, they have made a lot of bad investments and lent too much money secured against assets that where priced too high. Many of these banks may not survive. There are now also concerns that a number of Governments will start defaulting on their debt obligations. If this begins happening, we will probably see share markets fall lower. Many companies who are not affected by a foreign Government default will still have their share price pushed lower by the fear that pervades the markets. Other companies will go out of business.

While the global economic landscape remains discouraging, it is worth remembering that market downturns do provide opportunities both for good businesses and good investors. However, it’s a time when it is particularly important to be selective in your investments.

For an insightful discussion of the current investment climate, you can click here for a 20 minute webcast of The Honourable Dr. Philippa Malmgren.

As part of her research, The Honorable Dr. Philippa Malmgren regularly visits with leading policy-makers among the offices of heads of government, the boards of central banks and other officials among the G7 countries.

Parallels with the 1930’s?

The root of the current problems has been the excessive growth in corporate and personal debt, particularly in the US. US debt had recently grown to a massive 350% of GDP from a low of 130% in the 1950's. It fell to 130% after reaching 260% of GDP in the 1930's. It took 20 years for the US to finish de-leveraging from the excesses that led up to the Great Depression.

Given that we are likely to have a long period of de-leveraging (reducing debt) again, it is interesting to look at what happened to US stocks in the 1930s and after they bottomed (during the time the de-leveraging was going on). You can click here to see our analysis of the two time periods.

Our charts show two very different share markets in the US and similarities in Australia. In the US, the recent market boom and down-turn is nothing like the size of the boom that preceded the 1929–32 crash, so perhaps the crash should not be as great either? In Australia, the similarities are greater. After rising 145% in the eight years prior to July 1929, the Australian share market then fell 46% over the next 25 months. Like after all other market downturns this century, the share market then rose very strongly - by 159% over the next 5 and a half years (19%pa).

It’s comforting to know that even after the share market crash in 1929, share markets recovered strongly. They always do. That’s why it is important to stay focused on the long term when you are investing in shares.

Where to from here?

The risks

With more bad economic news coming in Australia and around the globe, many stocks will fall further and some will never recover. Those companies with near term debt financing requirements are at particular risk.
Inflation - with so much fiscal stimulus, we think future inflation is unavoidable. Inflation has the potential to erode the value of your wealth if you do not adjust your portfolio to protect yourself from it.
With Government yields so low, there is a risk that they will increase (particularly if inflation does happen) and cause losses in government bond portfolios.

The opportunities

Many asset prices will get to lows you’ll only see once in your lifetime. At some point, risk takers will be rewarded. In our recent research paper, we also look at a range of investment strategies after a market crash.
Many assets, not just shares, are currently offering good dividend yields. In an environment where share prices could go sideways for a while, these assets could offer better returns than cash over a 1 – 2 year period.
Supply in many commodity markets has been substantially reduced (eg, mine closures and oil production cuts). Even if demand does not pick up, reduced supply could increase commodity prices. Commodities are also typically a hedge against inflation.
Home loan rates haven’t been this low in 40 years, they are unlikely to stay that way. If you are on variable home loan rate, now may be the time to start investigating the costs and benefits of fixing part of your loan. Having an appropriate loan structure is a critical part of your wealth accumulation plan, so please call us if you would like to review your loan or take out a new one.

As you know, we constantly monitor all our client portfolios. Given the current challenging environment, we will have discussed modifications to your strategy with you and will most likely discuss more opportunities with you in the near future.

If you know anyone who may benefit from financial advice, we would be very pleased to hear from them. You can direct them to our web site, where we are currently offering a Global Financial Crisis Recovery Plan.

A message for your Expat friends

While the Australian job market isn’t strong at the moment, it’s even worse in the US and UK. You may have friends returning to Australia who would benefit from some financial advice when they arrive. Some of the ways we can help returning Australian’s include:

Help with advice on changed investment and superannuation laws in Australia
Home loan advice and structuring
Personal Insurance advice
General investment strategy and advice
Help with transferring over UK Pension schemes or other UK investments.

If you know anyone who may benefit from financial advice, we would be very pleased to hear from them. You can direct them to our web site, where we discuss our services to people returning to Australia.

Investment Returns Update

Sector returns to 29th February 2009
	3 mths	1 year	3 Yrs, pa	5 Yrs,pa
Australian shares	-9%	-37%	-8%	4%
Global shares ($A hedged)	-14%	-43%	-15%	-3%
Emerging markets (local currency)	1%	-36%	-5%	7%
Australian listed property	-32%	-58%	-26%	-10%
Global listed property ($A hedged)	-19%	-58%	-25%
Australian Government bonds	1%	14%	7%	7%
Cash (Bank Bill Index)	1%	7%	7%	6%
Note: Global and Australian shares are up about 7% to 24 March.

This newsletter and prevous issues can be read on our web site.

Please note that our office phone number has changed to 02 8086 2462.