Quarterly Newsletter - April 08
Major Indices (as of 1/4/08)
* PE ratios as of Mar 08 (based on historical
Commentary – Past 3 months
Third Quarter 07/08 financial year saw share markets globally suffering their largest falls in over 20 years (since the 1987 crash). For example Shanghai down 34.4%, Germany’s DAX down 18.7%, Japan’s Nikkei down 18.3%,Hong Kong’s Hang Seng down 17.9%, Australia’s ASX 200 down 15.5% (down 21.6% from the November 1 high),USA’s S&P 500 down 10.4%, and the USA Dow down 7.9%.
There was no escaping the global rout as we saw the near collapse of many companies especially financials including Bear Sterns (the 5th largest investment bank in the USA), Northern Rock (UK home lender), Centro (shopping centres), ABC Child Care, MFS (property & funds management), Allco (small investment bank), Tricom (stockbroker) and Opes Prime(stockbroker).
Companies carrying high debt levels or those with directors carrying high levels of margin loans have been most severely hit as the Western world endures a painful unwinding of the debt binge of the last decade.
response, the US Fed dropped rates by a massive 2% over the quarter
and along with global federal reserves has injected billions of
dollars of liquidity into the system to minimize the liquidity crunch.
the USA housing crisis has deepened as the housing bubble slowly
deflates, pulling down with it the sub-prime lenders.
In Australia the Federal Reserve has continued to raise rates to thwart inflation. This may well push the Australian residential property market into recession as has already occurred in the Australian Listed Property sector which has had falls of 40-50%.
The best performing sector for the past 3 months were cash, commodities (gold, wheat, rice) and resources, the worst being listed property and financials.
Currencies over the quarter were summarized by large falls in the US dollar and the strengthening of all other currencies in particular the Euro.
As discussed in previous newsletters the fall in the listed property sector has long been expected as has the fall in the local Chinese market. Both had been overvalued with the former suffering from rising interest rates as well.
The call late in 2007 to increase cash weightings to 40% or more in case markets deteriorated was vindicated this past quarter.
Japan and Korean steel makers agreed in February to a huge 65% increase in iron ore prices, which along with large likely increases in coking coal to around 200USD/tonne (used for Steel production) and thermal heating coal to around 100USD/tonne should ensure another very strong year for the bulk resource companies such as Vale, Rio and BHP.
World oil prices remained high at USD $102 per barrel on concerns of supply disruptions and strong Chinese demand. Copper has soared to around USD 4 per pound while Gold broke through the USD 1,000 mark only to end the quarter back at USD 909.
Generally most metals and
energy products have been strong as have the agricultural commodities
especially wheat and rice on world shortages
Commentary – Forecast next 6 months
The next 6 months will see a further slow down in the USA and most likely a recession. However at some point the interest rate reductions by the US Federal Reserve will start to kick in and the US consumer will again begin to spend. The US housing bubble may yet take 5 years to deflate, as I think Benake will need to quickly raise rates once the market recovers to thwart the global inflation problem. Obviously Oil prices are the key danger to global inflation along with food prices.
As to when share markets will recover that is a tricky question.
The average bear market of the last 4 decades in Australia has run for 14 months, so based on this we should expect to write of 2008 as a bad year and look for a recovery in early 2009. My expectation is that markets will move sideways over the next few months and the strongest areas of world growth (China, India, Dubai, N11 countries) will lead the recovery.
Share market valuations are at decade lows which means it is a good time to slowly accumulate quality companies and managed funds.
Essential areas such as food companies, infrastructure, and energy should do well.
Avoid those areas heavily exposed to the impending Australian residential property bubble slowdown, and companies with large debt.
Avoid Australian Residential Property as it is likely to be the next area hit.(see graphs below).
Nb: Back in 2007 and in early Jan 2008 this newsletter correctly warned clients to build up their cash levels in case the US situation deteriorated.
US Recession (“sub- prime crisis”)
Some worrying thoughts on Sub-Prime debt:
What to do?
Continue to take a cautious approach and only buy into the market on extreme weakness.
The Decoupling Story -- Will the developing World decouple from the Developed World and USA?
The short answer is, Yes.
Firstly, it is important to realize that the Western’s world period of credit binging is fast coming to an end with rising interest rates due largely to increasing commodity prices (including Oil, Iron Ore, Coal, Wheat, Milk etc).
The party is over in America and soon will be in England and Australia, and the great residential property bubble will continue to deflate.
Whilst all this is happening the regions of the world that have been working and not partying for the past decade will decouple from the debt ridden countries.
So, expect China, Dubai, Germany, Canada, and the oil rich nations to flourish over the next decade.
So, yes, decoupling of world economies will occur; but it will really be a decoupling between the debt countries and the surplus countries and it may take some time for it to show.
The Dubai Boom – Another Singapore or Hong Kong in the making
Dubai is a city on the move. Here are a few statistics to get a feel of the boom:
As you can see Dubai and the UAE is rapidly growing as a region and is a worthwhile area to invest some funds in. This is not yet easy, however is possibly by accessing some Australian companies that have a strong foothold in the region.
The N 11
The “Next 11” is a term coined to describe the next 11 major economies that will follow the BRICS (Brazil, Russia, India & China).
The BRICs currently represent the majority of world GDP growth, whilst the N 11 contribute 7%, which is expected to grow.
The N 11 countries are Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey, and Vietnam.
The major investment themes in the N 11 will be Urbanisation (Bangladesh, Vietnam), Infrastructure (Mexico, Philippines, Indonesia, Turkey) and Technology such as rising mobile phone and internet penetration rates (all N 11 countries).
It is wise to remember that the world
is growing by 70 million people per year and much of this growth is
occurring in the
BRICs and the
It is always wise to be aware of the major demographic trends in the world as this leads to great investment opportunities or failures.
Countries to be wary of with declining populations are – Japan, Russia, Italy, Spain
Countries with aging populations – USA, Japan, Europe, Australia
The baby boomers retiring over the next 10 years around the Western world will cause a number of things to happen. There will be less demand for overpriced family homes, 4WDs, and all those things no longer required by the ageing baby boomers.
There will be more demand for travel services (cruising, caravans, air travel etc), health services and townhouses/units possibly by the sea (sea-change).
So, if investing in the western countries be aware of the new needs of the baby boomers and adjust your portfolio accordingly.
Growth Protection 100 – (Opens March 08)
This is the latest new structured product from Macquarie Bank and Credit Suisse. The investment is an index fund designed to match the performance of the top 200 shares on the Australian Stock Exchange (ASX).
You can invest in the fund using your own cash or using borrowed funds.
The main advantages are:
Who is suited to this product?
Closing Date -- May 5 , 2008
Reflexions – (Opens May 08)
This Macquarie Bank structured product allows you to borrow cheaply in Japanese Yen, Euro or USD and then invest in any or all of the following funds, all with a capital guarantee. To invest in Reflexions you must borrow 100%.
Global Themes 100 (opens May/June)
Similar structure to above.
To find out more please contact an adviser at firstname.lastname@example.org.
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.