Quarterly Newsletter - April 07
* PE ratios as of Dec 06 US 10 Yr Bond Rate – 4.75%
Commentary – Past 3 months
3rd Quarter 06/07 financial year saw share markets globally boom in early and mid February followed by a substantial fall late February initiated by a 9% fall on the Shanghai Composite Index in China. Fears over unwinding of the Yen carry trade and sub-prime mortgages in the USA also caused markets to get the jitters.
However mostly this was a healthy correction for the overall strong global equity markets, and March saw worries subside and markets recover.
The best performing sectors for the past 3 months were resources and, the worst being listed property. World growth remained robust, especially China, India, and other parts of the Asian region. In fact in February China’s trade surplus grew a staggering tenfold compared to the same month last year, and exports were also up a whopping 52%.
It is wise to remember that Asia represents over 60% of the world’s population and is undergoing huge growth in personal wealth as represented by their GDP and new found spending power.
World oil prices have risen again in recent months currently at around $68 US/barrel. Other resources prices have remained high, in particular Nickel, Copper and Uranium. Copper is trading at a 3 month high back above the significant 3 USD/pound. China's copper imports more than doubled last month from a year ago on rising demand from construction companies in China. Goldman Sachs JBWere, the Australian affiliate of the world's largest investment bank, expects the copper market to have a deficit of 202,000 tons this year, more than the 57,000 tons a year ago. China's copper usage could grow 12 percent this year, exceeding 8 percent rate estimated earlier.
This again shows the strength of commodity prices and supports the stronger for longer theory for the resources boom. Uranium also has gone crazy and is now at around 95 USD/pound a fivefold increase over the last 5 years.
Finally a tax on India’s Iron ore exports has helped push Iron
Ore forecasts up for 2008.
Commentary – Forecast next 6 months
In USA we are unlikely to see further interest rate rises this year, and in Australia we may get one more small (0.25%) rise. The European Central Bank and the Bank of Japan, started this process of rising rates later than the US and Australia, and are generally expected to continue on their path of raising interest rates gradually over the period ahead. For a contrary view see section on Japan and global money imbalances later in this newsletter.
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 and markets are naturally jittery due to the sub-prime mortgage issue, strong economic conditions are generally prevailing in other parts of the world. Growth in the Chinese economy has remained around10 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.
The main areas to be cautious about at present are :
I think in the next 6 months (barring disasters or a spread of mortgage defaults into other regions) 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 (some Asian regions, excluding Japan,India,Shanghai) 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 25.8 , compared to India 23.1 ,China 15.9, Germany 14.3 , or South Korea at 11.1 .(Nb: These PE ratios were as of Nov 2006) Note: Shanghai A market, PE is now above 40.
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.
I expect the Australian share market to underperform Asian
markets over the next 6 months, due to a weakened property
a fully valued sharemarket.
There may even be a few ex–investment properties going for reasonable prices at last.
With NSW state elections and Federal elections we may see political change, and a new willingness to tackle the big infrastructure (ie; poor railways, water supply, electricity, broadband) problems .This could be positive for companies such as Leighton Holdings etc. Overall expect financial services and resources to do well and property trusts to struggle.
World Imbalance of Monies – Asia’s surplus and USA’s debt.
Japan really is a smart country. For example they have the largest surplus of any country in the world, the best transport systems in the world, and in recent years they are the biggest lender in the world.
Lets face it, it is a smart move to keep Japanese rates low, so people all over the world borrow from the Japanese banks, who make a very healthy and easy profit margin say around 2% of all loan monies. Now that is an easy way to make huge money.
So why would Japan rush to raise interest rates and possibly risk losing this lucrative multi-billion dollar business. The answer off course is, they won’t.
So Japanese rates should stay well below the worlds for some time, and the huge “Yen carry trade” will continue unless something dramatic happens.
Likewise China would prefer to keep their currency cheap, so they remain competitive with their exports. This, off course, leads to an ever increasing Chinese surplus which recently broke through the USD1 trillion barrier. Look for the Chinese to develop an investment fund to invest these monies back into global markets to further strengthen the Chinese movement towards being the next super power.
The Chinese and other governments are in essence bankrolling US consumers, who in turn are mortgaging their children's income.
The cumulative effects of this borrowing are frightening. The total external US debt now exceeds $6 trillion. That comes to $20,000 for each American, plus interest.
Legislative Changes (since May 06 Budget)
From Budget night (9/5/06)
Since Budget Night
From March 07
New names for Super Contributions
Employment termination payments
From 1 July 2007 payments made in consequence of the
termination of employment, ie ‘eligible termination payments’ will be replaced by ‘employment
termination payments’ (excludes payments
made from a superannuation fund).
From 20th September 2007
Removal of 50% asset test exemption for complying income
Before July 1,2007
Small business owners have the ability to contribute up to $1 million to super from the proceeds of the sale of a business.
Tax File Number (TFN)
It’s very important that you provide your Tax File Number (TFN) to your super fund. If you have not provided your TFN to your super fund, tax will be deducted at the top marginal rate from your taxable contributions made after 1 July 2007. Additionally, you will not be able to make any undeducted contributions.
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
suitable to your own needs and objectives.