Quarterly Newsletter - July 09

Major Indices   (as of 4/07/09)

 
Currency
(AUD)
Interest Rate(%)
Share Index
* PE ratio
(historical)
GDP (%) 2008
GDP Forecast (2009) IMF
Population
(m=million)
Foreign Surplus (Debt) %GDP
Australia
1.00
3.00
All Ords
3,826
14.60
2.7
-1.5
21m
(5.0)
USA (Dollar)
0.79
0.25
S&P 500
787
17.46
2.2
-2.8
300m
(6.5)
Largest dollar deficit, 2009 11.2 trillion USD and growing rapidly
Japan (Yen)
77
0.10
Nikkei 225
9,816
25.66
1.9
-6.2
127m (declining)
2007 - USD 875 billion 2nd largest dollar surplus
China (Yuan)
5.45
5.31
CSI 300
3,327
Hang Seng
18,203
Mainland China
22.92
Hong Kong
18.68
9.0
6.5
1,350m
2008- USD 2 Trillion, number 1 largest surplus in the world
India (Rupee)
38
4.75
BSE 200
3,327
15
8.9
4.5
1,150m
Europe (Euro)
0.57
1.00
DJ Stoxx 50
2,376
15.31
2.6
-3.2
725m (declining)
 
UK (pound)
0.49
0.50
FTSE 100
4,236
15.35
3.1
-4.1
60m
 
Global
N/A
 
 
18.11
-1.3
6,000m
 

* PE ratios (based on historical earnings)
US 10 Yr Bond Rate – 4.25%    US 30 Yr Bond Rate – 5.00%
Source: Bloomberg


Source: Bespoke, 25 June 2009, Forward PEs

Commodities

Oil - Nymex (USD/barrel) 67
Natural Gas (per million mbtu) 3.62
Coal-thermal ($/tonne) 69
Uranium (USD/pound) 52
Gold (USD/ounce) 932
Wheat (cents/bushel) 529
 
Iron Ore ($/tonne) spot price 75
Copper (USD/pound) 2.24
Nickel (USD/pound) 7.26
Zinc (USD/pound) 0.69
Aluminium (USD/pound) 0.71
Corn (cents/bushel) 357
  [www.kitco.com]
Source : Kitco, quotemarkets

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 dramatically but is still fragile.
In Australia the best performing sectors for the past 3 months were energy and the finance sector.

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.

Commodities
The Baltic Dry Index, a measure of shipping costs for commodities, rose substantially over the quarter to reach 3,520 on renewed demand for commodities and increased global industrial production. The last few weeks has seen it stabilize suggesting we may see markets now stabilize again for awhile.

Nickel was the outstanding performer for the quarter up over 50% whilst most commodities rose strongly led by Oil which reached $70/ barrel.
Iron ore contract prices were settled with Japan and Korea at a 33% discount to the previous boom prices; however China and BHP are likely to move to a spot price system currently at $75/tonne.

Baltic Dry Index (BDI) - July 2009

  

House prices
Australian home prices have recently begun to stabilize and buyer interest has increased with record low interest rates and recent price falls increasing affordability.
The first home buyers scheme has been extended and the huge falls in the high end property market have stopped.


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.

  • Long term buyers should slowly accumulate quality assets upon share price weakness as it is possible we have now passed the worst of the depression.
  • Avoid US currency, and be cautious still on US shares as they are not particularly cheap.
  • Invest in countries with currency surpluses and positive GDP (eg; China)
  • Avoid Bonds (they perform poorly when interest rates start to rise)
  • Increase exposure to shares particularly in China, Asia, and Emerging Economies.
  • Increase exposure to the Building of infrastructure areas and Commercial Property sector.
  • Keep some Cash, and continue to phase back into the market. It is important to note that the cash rate has fallen and cash returns are now very low.
  • Be cautious or don’t buy overvalued Australian residential property.

May 12 Federal Budget Update

Economy
2009/2010 Deficit $57.593 billion (with total deficits until 2015), unemployment forecast 09/10 of 8.25%, GDP -0.5%.

Infrastructure Spending
$22 billion (b) in total, including $8.5b for road, rail and ports. $3.5b in new funding for clean energy initiatives and $2.6b in tertiary education.

First homebuyers
First home owners grant will be continued in full until October 1, then, it will be halved to $10,500 for existing homes, and $14,000 to new homes. The boost will end on December 31, although the existing $7000 first home owner’s grant will continue.

Pensioners, carers
Single aged pensioners will receive $32.49 more a week; couples will get an extra $10.14.
Increase in the aged pension age of 65 phased in from 2017 with an aim to settle it at 67 in 2023.

From New age pension age Affects people born Current age
1 July 2017 65 years 6 months 1 July 1952 – 31 Dec 1953 55.5 – 57
1 July 2019 66 1 Jan 1954 – 30 Jun 1955 54 – 55.5
1 July 2021 66 years 6 months 1 July 1955 – 31 Dec 1956 52.5 – 54
1 July 2023 67 1 Jan 1957 – onwards 52.5 or younger

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:

Taxable Income
Fringe Benefit
Target foreign income
Net investment losses
Salary sacrifice super contributions
Personal deductible super contributions.

NB: It will not count Allocated Pension income

Families – Family Tax Benefit A (FTB-A) and Family Tax Benefit B (FTB-B)
From 1 July 2009, as a cost reduction measure, the FTB –A payment rates will be indexed by the Consumer Price Index (CPI) consistent with other family payment such as FTB-B and the Baby Bonus. Currently the maximum rates of FTB-A for children under the age of 16 are benchmarked to the higher of a proportion of the combined couple rate of pension payments, or CPI. The upper income threshold for FTB-A, FTB-B, dependency tax offsets and the Baby Bonus will remain at its current level until July 2012. These thresholds would ordinarily be indexed by CPI.

Benefit Type Income purpose Cut off threshold
Family Tax Benefit Part B Income of primary income earner $150,000
Dependency tax offset Income of taxpayer claiming the offset $150,000
Baby Bonus Combined family income in the six months following the birth of the child $75,000
Family Tax Benefit Part A Combined family income before losing entitlement $94,316 (plus $3,796 for each additional child)

Heath insurance
From July next year, singles who earn between $75,000 and $90,000 will be slugged with an increased private health insurance bill due to a cut in the rebate to 20 per cent. The Medicare surcharge will remain at 1 per cent.

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
From 2011 the Government will introduce paid parental leave for 18 weeks at the minimum wage - or around $540 a week. In opting for the plan, working mums and dads forfeit the right to receive the baby bonus and certain family tax benefits.

Tax
The previous Liberal Government promised tax cuts were retained for the 2009/10 year.

Income threshold Tax rate
$0 - $6,000 0%
$6,001 - $35,000 15%
$35,001 - $80,000 30%
$80,001 - $180,000 38%
$180,000+ 45%

Superannuation/Retirees
Tax deductible Superannuation contribution caps will be halved from $100,000 to $50,000 (over 50yos) and $50,000 to $25,000 (under 50 yos) from July 1, 2009, and then to $25,000 from 2012.

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.

Small Business
A 50 per cent Small Business Tax Break for eligible assets.

Opinion
The main concern with the 2009 Federal Budget is that Australia is going the same way as US, Europe and UK and getting itself heavily in debt. This can in time lead to local inflation due to money printing by reserve banks, and currency weakness.

One more reason is to diversify your portfolios, and to invest in regions of foreign account surplus such as China.

New Products

Colonial First State First Choice Emerging Markets Fund

This fund was launched in February 2009 and invests in the Emerging Markets.
Namely, the BRIC (Brazil, Russia, India and China) countries, and the Next 11.
The Next 11 refers to those economies expected to be the next large emerging economies.
See table below for IMF growth projections for 2009.

Country GDP Growth Forecast 2009 GDP Growth Forecast 2010
Brazil -1.3 2.2
Russia -6.0 0.5
India 4.5 5.6
China 6.5 7.5
Bangladesh 5.0 5.4
Egypt 3.6 3.0
Indonesia 2.5 3.5
Iran 3.2 3.0
Mexico -3.7 1.0
Nigeria 2.9 2.6
Pakistan 2.5 3.5
Philippines 0.5 1.0
Vietnam 3.3 4.0
For Comparison only
USA -2.8 0
Japan -6.2 0.5
UK -4.1 -0.4

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 contactus@hnwfinancialadvising.com.au 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 personal advice suitable to your own needs and objectives.