Majella Newsletter

Market update

The share market recovery in the past 6 months has been strong and swift thanks to the massive Government stimulus around the world and a growing belief that we are not about to plunge into the next global depression. Share markets are up strongly from their March 2009 lows: the Australian share market is up 48%, the world index is up 53% and emerging markets are up 61%. As we said in our March newsletter, the market crash - while painful for those invested - offered many incredible buying opportunities for those willing to invest more cash. But now that markets have rallied, are there still buying opportunities present? In short, we believe there are, but you may have to look harder and be more patient. There are also some significant risks to manage.

Sharemarkets are Recovering

Data: MSCI indecies, including dividends, local currenvy, 5 years to Sept 2009

The outlook

Most professional investors are saying that share markets are now more fairly priced - no longer priced for depression. There is also concern about a potential near term pull-back given the extent of the bounce. We think any short term dip will be short-lived as it will be seen as a buying opportunity by those who missed the market bottom. There is, however, a risk of the markets going nowhere for a relatively long period of time – perhaps even a year or more. In this environment, investments offering stable dividends and coupon payments will help support your returns.

At a conference we attended recently, economists from around the world predicted a difficult period ahead characterised by:

future inflation (although some were also concerned about deflation)
lower growth in GDP from the major developed economies and therefore low earnings growth from companies dependent on these economies
higher market volatility
US dollar depreciation
and an era of lower average returns than prior to the crash.

What most concerned them was how the US and the UK were going to service their massive budget deficits and bring them under control over time. Many believed they would have to inflate them away. The impact of Government policies on asset markets will be significant and something to be aware of as an investor.

On the other hand, all speakers were positive about the outlook for the emerging economies. These countries were less leveraged than the developed world before the crisis and have ongoing momentum for rising incomes and economic growth. This is where most see opportunities.

Another theme was to prefer “hard asset” - investments that are linked to physical assets. This includes infrastructure, property and commodities.

What happened historically after a crash?

As we have discussed before, markets usually bounce strongly immediately after a crash. We also know that markets return to their previous market highs – how long it takes is the key. In Australia, the market returned to its high after the last three crashes of about 50% (1929, 1973/74 and 1987) in 4 to 6 years. The global MSCI index returned to its previous highs after 3 to 6.5 years after 1973/74, 1987 and the dot com crash of 2000-02.

For more discussion on share market behavior after crashes, please see our research paper.

While we have had a strong share market bounce around the world, there is still a long way to go before markets recover to previous highs. The Australian market still has to increase by 49% to get back to its November 2007 high. If the market takes a full 5 years to recover, a broad investment in the Australian share market will deliver a 9%pa return plus dividends over the next four and a half years. For long term investors, that is a very attractive return.

Book/DVD Recommendation- “The Ascent of Money” by Niall Ferguson

The ABC recently showed a program called, “The Ascent of Money”, based on the book written by Scottish professor Niall Ferguson. The book or DVD is worth a read/watch for anyone interested in how or markets and system of money evolved and works today. The book starts with an historical account of how currency actually started and moves through financial history to causes of the Global Financial Crisis of 2008. It’s a reasonably easy read or fascinating viewing if you get the DVD.

The synopsis on his web site says: ”Bread, cash, dosh, dough, loot: Call it what you like, it matters. To Christians, love of it is the root of all evil. To generals, it’s the sinews of war. To revolutionaries, it’s the chains of labour. But in The Ascent of Money, Niall Ferguson shows that finance is in fact the foundation of human progress. What’s more, he reveals financial history as the essential back-story behind all history. The evolution of credit and debt was as important as any technological innovation in the rise of civilization..."

We think it’s a worthwhile read (or watch). If you would like to read a copy of the book or watch the DVD, please give us a call or drop us an email and we’d be happy to send one to you.

Our Services

Our services to clients may include just one or all of the following areas:

In offering a complete financial service, we also provide strategic advice on taxation planning, loans (property and investment) and estate planning. While we do not directly provide accounting, mortgage broking or legal services, we can refer you to professional providers in each of these groups.

Investment Returns Update

Sector returns to 31st August 2009
	3 mths	1 year	3 Yrs, pa	5 Yrs,pa
Australian shares	19%	-8%	0%	9%
Global shares ($A hedged)	12%	-20%	-6%	3%
Emerging markets (local currency)	15%	10%	8%	16%
Australian listed property	25%	-34%	-20%	-6%
Global listed property ($A hedged)	23%	-33%	-15%
Australian Government bonds	0%	8%	6%	6%
Cash (Bank Bill Index)	1%	5%	6%	6%

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

Note: The information provided in this document is general advice and may not be appropriate for your specific needs. Please speak to an adviser before acting on any of this information.

Lisa Faddy 0402 042 962
Joanna McCreery 0414 234 932
Office 02 8086 2462

Or via our web site: www.majellawealth.com.au