Quarterly Newsletter - Jan 07

Indices

Australia

All Ords – 5,530
Australian PE – 16.36
Australian GDP 06 ~ 3%
Australian GDP 07 (Forecast) ~ 2.5%
AUD – 0.78 USD
RBA Interest rates – 6.25% (as of Nov 06 meeting)
Oil - $62 USD per barrel

USA

Dow Jones -12,360    USA S&P 500 -1,413    NASDAQ - 2,432
USA PE - 17.8
USA GDP 07 (Forecast) ~ 2.0%
USA Interest Rates -5.25%

Global

Global average PE – 15.9
World GDP 06 ~ 5%
World GDP 07 (Forecast) ~ 4.5%

Commentary – Past 6 months

1st Quarter 06/07 financial year saw share markets globally retreat from their May highs as US Federal Reserve chairman Ben Bernake spooked markets with his speech coinciding with the seventeenth consecutive interest rate rise in the US. Fear overtook share markets globally as fears grew that rising US interest rates would likely lead to a slowing US housing market and the wider US economy, and possibly a US recession. At this stage a US recession now looks unlikely, and a soft landing for the US economy looks the most likely outcome. The brief Israel conflict also served to temporarily move markets downwards.

2nd Quarter 06/07 Financial Year
Unusually this year October was a strong month for world and Australian share markets. In hindsight this is probably due to the fact markets were oversold in the preceeding months and fears of a US recession have subsided.
In the US President Bush’s power has been weakened by the elections , which is leading to strong pressure on a pullout from Iraq. This will have interesting effects on world markets depending upon how settled the middle east remains. At this stage oil prices are subsiding , so perhaps the markets views favourably a US withdrawal from Iraq.

The best performing sectors for the past 6 months were listed property, and the worst were emerging markets and the resources sector.
World growth remained robust, especially China , India ,and other parts of the Asian region. Of note was Vietnam holding APEC, and their entry into the World Trade Organization.(WTO).

Commentary – Forecast next 6 months

With this background of global expansion, the world’s major central banks are at varying stages in the process of lifting their interest rates back to more normal levels. In the United States, short-term interest rates are now back around historical averages. The European Central Bank and the Bank of Japan, started this process later than the US, and are generally expected to continue on their path of raising interest rates gradually over the period ahead.

Most expectations are that the world economy will continue to grow at an above-average pace in the year ahead, albeit not quite as strongly as in 2006. While growth in the United States has moderated recently, strong economic conditions are generally prevailing in other parts of the world. Growth in the Chinese economy has remained above 10 per cent (and India around 8%) , and there has been a significant improvement in conditions in the euro area since the beginning of the year. The expansion in Japan is continuing, and strong growth rates are being seen in a range of emerging economies in Asia and elsewhere. Overall the global expansion appears broadly based, and observers generally expect it to remain robust in the face of the moderate slowing now underway in the United States.

While world oil prices have declined from their peaks over recent months, other resources prices have remained high, with base metals prices on average around 60 per cent higher than at the beginning of the year. China, India and emerging SE Asia as well as South America and the oil rich nations (Russia, Norway, Saudi Arabia etc) should continue to grow strongly and continue to urbanize at a rapid rate. This should lead to continued strong demand for commodities and help to ensure prices stay higher for longer and the resource boom continues for many years to come. An example of this, the Chinese Central Government Plan is to move 400 million people from the country to the city over the next 10 years, a scale of movement never seen before in human history. One only has to travel to China, India , or Dubai to witness the frenzy of construction. I believe China will stop at nothing to showcase their country for the 2008 Beijing Olympics.

Also the oil rich countries will continue to build up their cities to showcase themselves and help attract tourism. The IMF forecast the oil states will rack up a current account surplas of $480US billion in 2006 , three times that of China. The middle East is currently undergoing a US$1 trillion construction boom. In Kuwait they are currently building a 1km high tower in “Silk City” , amidst a new $US 150 billion city.

I think in the next 6 months (barring disasters such as Sept 11, Iraq war) we will see a struggle between higher interest rates and commodity prices(working toward slowing growth and sharemarkets ) versus very strong Asian growth and subsequent strong World Growth (helping sharemarkets) .

Those regions of the world that have strong GDP growth and are valued reasonably (Asian regions, excluding Japan) will do well, whilst areas that are overvalued or that have weak growth will do poorly (Japan, USA).
For example Japan trades on a historical Price Earnings (PE) ratio of 30.8 , compared to India 18.3 ,China 16.4 , Germany 13.7 , or South Korea at 10.9 .(Nb: These PE ratios were as of June 2006)

Finally it is worth remembering that the US dollar could well weaken significantly if the Asian regions start to call in their debt, or decide to lend their massive surpluses into other currencies (Euros, Yen) or into other parts of the world.

NB : High Net Worth Financial Advising attempts to enhance overall return for clients by investing in undervalued regions of the world and undervalued asset classes, that have positive growth stories.

NB : The contents of this newsletter does not constitute personal advice and is general in nature ,please see your adviser for personal advice suitable to your own needs and objectives.