Quarterly Newsletter - July 09
Major Indices (as of 4/07/09)
* PE ratios (based on historical
Commentary – Past 3 months
Fourth Quarter 08/09 financial year saw share markets globally recover strongly after stabilizing last quarter. The recovery was lead by the emerging markets and the commodities on expectations that global recovery is not far away.
India was the star with a rise of 61% over the quarter with China rising 31%, USA 14% and Australia 8%.
Global exports are still weak and unemployment is peaking currently at 9.5% in the USA and likely to soon hit double figures. However there are some signs of increased manufacturing activity and industrial production as companies seek to replenish there very run down inventories.
Global GDP is still abysmal with most of the world still in negative growth and recession, with China and India being the two outstanding exemptions. So it was not surprising to see their share markets lead the recovery.
With a solid share market recovery and some
signs the real economy may have bottomed investor sentiment has improved
but is still fragile.
Global Interest Rates have stabilized and US long term bonds have increased by around 1.5% in the past quarter on recovery hopes causing banks to increase their fixed rate loans on offer.
Currencies over the quarter were summarized by a strong recovery of the Aussie dollar in line with the commodities recovery.
Nickel was the outstanding
performer for the quarter up over 50% whilst most commodities
rose strongly led
reached $70/ barrel.
Baltic Dry Index (BDI) - July 2009
Commentary – Forecast next 6 months
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 those areas benefitting from building new infrastructure.
The key indicators of recovery have started to recover, albeit slowly.
The credit spreads are improving, US house prices are arguably stabilizing, and the Baltic Dry Index has started to recover but has currently stalled. (See graph above).
On the flip side unemployment is still increasing and poses the greatest risk to global recovery.
Share markets are likely to consolidate for the next few months while global economies start to recover and show more evidence that recovery is truly coming.
Investors that hold significant cash should continue to phase back into the share markets especially given the falling cash rate and reasonable valuations in some areas of the share market.
As previously stated it would be wise to concentrate on quality assets, with low debt levels that can benefit from the recovery.
Those countries with positive GDP Growth and demographics such as China and India are preferred. The Next 11 emerging economies such as Indonesia, Vietnam and Philippines also should do well over time.
The fallout of the Global Financial Crisis (GFC) is that the developed economies Governments have massively increased their debt levels (see April 2009 HNW newsletter), which is likely to lead to weakening of their currency and possibly inflation and rising interest rates in those countries.
Therefore it is wise to be cautious on investing in those countries with huge debts such as USA, UK, and some parts of Europe.
The debt ridden Western economies may therefore suffer a cycle of deflation, currency collapse, hyperinflation, rising interest rates and further deflation.
The emerging economies that are well managed such as China will continue to flourish despite a slowdown in exports to the western countries. Their currencies will strengthen, and they will continue to buy commodities such as iron ore and copper to build cities to house their rising urbanization and affluence.
That is, we will see the wealth and currencies of the Western economies (excluding Japan) decline whilst the well managed emerging economies becoming increasingly wealthy. In effect a massive transfer from West to East.
What to do?
Continue to be cautious.
May 12 Federal Budget Update
From 20 September 2009 the income test taper will increase from 40 to 50 cents in the dollar for a single pensioner and from 20 to 25 cents in the dollar for each member of a couple above the allowable income free thresholds.
Pension Bonus Scheme closed to new entrants from 20 September 2009, to be replaced by an income test.
Based on this announcement, from 1 July 2009 the definition of Adjusted Taxable Income (ATI) used for Commonwealth Seniors Health Care Card (CSHC) will include:
NB: It will not count Allocated Pension income
Families – Family
Tax Benefit A (FTB-A) and Family Tax Benefit B (FTB-B)
For those earning between $90,000 and $120,000 a year, the rebate will fall to 10 per cent with the surcharge at 1.25 per cent.
Those earning more than $120,000 will receive no rebate at all with a surcharge of 1.5 per cent.
Paid parental leave
The Government co-contribution for low income earners will be reduced from 150 per cent to 100 per cent for the next four years, and to 125 per cent from July 1 2012 to 30 June 2014. It will be increased back to 150 per cent from 2014.
Allocated Pensions will continue to be allowed to reduce the minimum pension payment by up to 50% for the 2009/10 year.
One more reason is to diversify your portfolios, and to invest in regions of foreign account surplus such as China.
Colonial First State First Choice Emerging Markets Fund
This fund was launched in February 2009 and invests in the Emerging
As you can see from the above table the growth forecasts for the Emerging markets is very strong, particularly in comparison to the Western markets.
To find out more please contact an adviser at email@example.com or phone 0430-218110 to speak to an advisor.
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.