Quarterly Newsletter - January 09
Major Indices (as of 12/12/08)
* PE ratios (based on historical
Commentary – Past 3 months
Second Quarter 08/09 financial year saw share markets globally continue to suffer especially in October as forced selling by hedge funds and margin lenders pushed the markets generally over 50% falls for the year, with a dislocation between sentiment and market fundamentals. This is the largest one year fall this century and is only beaten by the 1973-74 two year fall of 60% in terms of total falls in share markets.
Unemployment continued to increase which is of concern as sentiment and world growth continued to deteriorate.
As euphoria is the last stage of bull markets, despair is the last stage of bear markets. That alone would suggest we are at or near the bottom of this severe bear market.
World governments have acted dramatically with the largest concerted stimulus packages ever seen.
The Chinese Stimulus Package was announced and included USD 586,000,000,000 (586 Billion dollars) to be spent in 2009, and 2010 mostly towards infrastructure projects. Additionally the Chinese have slashed interest rates down to 5.58%.
The US Stimulus Package presented by Barack Obama included an estimated USD 500 billion plus package targeting infrastructure projects. This followed the Paulson Plan of USD 700 billion to recapitalize the US financial system.
Global Interest Rates were aggressively reduced, in some cases by as much as 3% in 3 months.
Oil prices continued to crash lower on the back of slowing world growth hitting lows in the low USD 40 per barrel before some recent recovery, alleviating global inflation concerns.
The best performing sector for the past 3 months again was cash. The worst were resources and commodities.
Currencies over the quarter were summarized by a further huge fall in the Aussie dollar as the RBA aggressively cut interest rates by 3% in a matter of 3 months. The Australian Dollar lost close to 20% as our reserve bank switched stance and dropped rates by 0.25% to 7.0% with talk of further rates decreases to follow in response to the Australian economy’s dramatic cooling. On a more positive note Australia’s finally making some positive trade surpluses to reduce our overall deficit thanks to the mining industry.
Oil lead a generalised decline in most commodities as the world has begun to factor in the increasing likelihood of a world slow down and recession (defined as World GDP falling below 2.5%). In particular the Iron Ore spot price has fallen from close to USD 200/tonne to around USD 72/tonne, and copper is down from around $4/pd to $1.41. This is all as a result of concerns over the credit squeeze and the subsequent global slowdown.
Interestingly Aluminum was the only metal not to fall this past quarter and Uranium was the next best with a mild fall.
This also led to large falls in soft commodities.
Below is a chart of the Baltic Dry Shipping Index which indicates
a massive fall in shipping rates. The index provides an
the price of moving the major raw materials by sea.
Interestingly this past week the Index tipped up for the first time since May. Further improvement here is another sign of world recovery, in particular in the global resources market.
Commentary – Forecast next 6 months
The balance in the world economies that I spoke about in the last newsletter (slowing growth and cheap share valuations), I believe has begun to swing in favour of shares.
A combination of massive fiscal (government spending) and monetary stimulus (interest rate cuts) by world Governments will begin to kick start the economies of the world, especially the Chinese economy, and the Infrastructure Sector.
The key indicators of recovery have started to recover.
The credit spreads are improving, US house prices are arguably stabilizing, and the VIX has fallen.
On the flip side unemployment is still increasing and poses the greatest risk to global recovery.
Investors that hold significant cash should begin to phase back into the share markets especially given the falling cash rate and excellent valuations in some areas of the share market. The phasing could be over 6 to12 months as full recovery is still some time away.
As previously stated it would be wise to concentrate on quality assets, with low debt levels that can benefit from the recovery.
What to do?
Continue to be cautious.
Australian Commercial Property Prices
The Australian Listed Property Sector is currently trading on a PE ratio of only 5 (very cheap!!) with a sector yield of 19%pa.This sector was the worst hit during the credit crisis as large property transactions are often very reliant on debt. Hence we saw the decline of Centro and others. However, with falling interest rates and credit spreads and hopefully maintaining most tenants in the shopping centres, offices and industrial parks this sector should rebound strongly back to it’s market darling status.
The next boom is likely to be in the companies that build or benefit from massive spending on Infrastructure. The most sensible way for world governments to create growth is to spend their saved money (China, Japan, Germany, Canada, Oil nations), or their borrowed/printed money (USA, Australia) to boost local infrastructure. The Chinese have announced massive plans to extend railway networks, roads and airports across China.
This will help stabilize the falling unemployment as well as help GDP and investor confidence.
In fact, this massive stimulus to one sector is likely to create the next boom – “ the Infrastructure Boom”.
Probably buying the companies that build the infrastructure will be the most profitable for investors. The construction companies, the engineering firms, and those companies involved in road, rail and bridge construction particularly in China.
It is also highly likely that the Obama stimulus plan and the Chinese plan will target building of alternative energy infrastructure.
Consider investments that give exposure to nuclear plants, wind and solar facilities or companies that build them or provide services to them.
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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.