Quarterly Newsletter - July 08
Major Indices (as of 1/7/08)
* PE ratios as of June 08 (based on historical
Commentary – Past 3 months
Fourth Quarter 07/08 financial year saw share markets globally continue to suffer despite a short lived recovery in April. The Shanghai market again led the decline.
The April recovery was halted by the dramatic rise in Oil prices, which has doubled over the past 6 months, and is contributing to global inflation concerns.
If oil was to rise further there is concern that world growth would slow dramatically and possibly cause a world recession.
With this fear uppermost in investor’s minds, the world share markets continued to fall and are currently retesting the March lows.
The US still sits on the brink of recession and US financial companies have now written of around 400 billion USD in sub-prime debt, with a possible further 600 billion USD still to come.
By the end of the 07/08 financial year the Australian market had it’s worse year in 26 years (since 1982), and valuations are at decade lows.
The best performing sector for the past 3 months were cash, commodities (oil), and energy, the worst again being listed property, financials and consumer discretionary.
The best countries were mostly in the Middle East or Africa and the worst was Vietnam.(see tables below)
Currencies over the quarter were summarized by continued falls in the US dollar and the strengthening of all other currencies in particular the Euro and the Australian dollar.
The call in last quarter’s newsletter to stick with energy and resources and to be careful with financials is starting to look fairly accurate.(see above graph)
Rio Tinto and soon BHP have agreed to settle with a huge 77-95% increase in iron ore prices, which along with the massive increases in coking coal to around 305 USD/tonne (used for Steel production) should ensure another very strong year for the bulk resource companies such as Vale, Rio and BHP.
World oil prices continued to rise peaking at USD $140 per barrel on concerns of supply disruptions and strong Chinese demand and arguably huge speculation from various market players. The oil price rise for this past quarter has been meteoric and has been by far the main issue in commodities this past quarter.
In the base metals Copper and Aluminium rose whilst Nickel and Zinc
Commentary – Forecast next 6 months
The next 6 months will see a further battle between a global inflation led slowdown and strong underlying valuations in many markets.
If oil was to decline and the inflation threat was to dissipate then the world markets (especially Asia) could have a substantial recovery. The key at the moment is the oil price.
Hopefully the countries that have been subsidizing oil will gradually remove their subsidies which will leads to a fall in demand due to price constraints.
My expectation is that most markets will move sideways or upwards over the next 6 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, companies with large debt.
Finally, a wise way to play the current market is to invest in companies that can benefit from a high oil price as well as a recovery if oil falls. Examples are BHP, and Sunland (SDG). The later makes its money from building, especially in Dubai, an area currently booming thanks to ‘petrodollars’.
What to do?
Continue to take a cautious approach. However, at current decade low valuations it is time to start accumulating over the next 6 months quality assets with good earnings growth projections.
The Car of the Future
With oil prices over
140 USD/barrel what is the future car going to look like?
My thought is it will be one of the last three and we will no longer need oil for our cars. Most likely it will be an Electric Car. Nissan Motors say they will have a fully electric car by 2010, and able to be sold globally by 2012-- that is only 4 years away.
It will have a range of 160km, and can be charged at home via a plug in power point in 6 hours, or in 30 minutes using a plug in ‘rapid charge’. It will use the latest technology lithium-ion batteries, located like pavers under a car's floor.
Tesler motors already sell an up market fully electric sports car for around USD 100,000 on a small scale of production, mostly to fill a niche market of Hollywood stars.
Meanwhile Tata Motors in India will be releasing their Compressed Air Car in August this year. It will have a top speed of 110km/hour and a range of 140km. It will most likely find it’s place as the no-frills future car.
Finally, the Hydrogen Car will run on liquid Hydrogen fuel and have no CO2 emissions. It’s main issue is the cost to produce Hydrogen by splitting water molecules, and the need for service stations.
London – The Finance Centre
The City's new Jerusalem makes up one third of Britain's entire economic output... and last year accounted for nearly half of U.K. GDP growth. It pays one third of all corporation tax... contributes a surplus of nearly £20 billion to the trade balance... and there are now more finance sector workers in Britain than there are construction workers, farmers and factory workers COMBINED. So rich and important has the City become that you cannot drive through without running over a millionaire. Every day, it turns over a third of the entire world's foreign exchange - more than $1 trillion.
" London has 40% of the global foreign equity market... trades 70% of all Eurobonds... and is the world's leading market for international insurance," reports the Fleet Street Letter. "Currently the business and finance sector accounts for 28% of Britain's GDP... some £306 billion per year. That's 21 times more money contributed to the economy than the construction industry… 35 times more money than the automotive sector... 47 times more money than the pharmaceuticals industry..."
Emerging markets are expected to spend USD 21.7 Trillion
on infrastructure in the next 10 years; most of it will be funded by
surpluses in emerging markets.
The graph below from the International Monetary Fund highlights the current dichotomy of world GDP growth.
In green we see the ‘advanced economies’ primarily USA, Japan, and Europe with GDP growth forecast at a paltry 1.3%.
In brown we see the ‘emerging and developing economies’ dominated by the Asian, South American, Eastern Europe and Africa with GDP forecast at 6.7%.
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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.