Quarterly Newsletter - January 2010
Major Indices (as of 2/01/10)
* PE ratios (based on historical
Commentary – Past 3 months
Second Quarter 09/10 financial year saw share markets globally consolidate and rise further after a spectacular rise since March 2009.
Global exports have steadied and global unemployment has stabilized around the world (Us at 10% unemployed), hopefully suggesting the worst is behind us.
The big scare for the quarter was the possibility of Dubai World (in reality Dubai) defaulting on its debt. Perhaps this scare is a warning sign that the glitzy emirate has grown too quickly using too much debt, and now faces the problems of loss of confidence and many vacant or half built condominiums. Greece, Ireland and Ukraine are also in severe financial stress. Whether this will all grow to be a bigger problem and cause global confidence to sour remains to be seen, but is another reason to remain cautious at this time.
China continues to do well based mostly on their Government stimulus, however there are concerns growing there regarding overcapacity as they continue to build buildings with no real demand, especially in the Shanghai business area where new office vacancies are alarmingly high.
The Chinese have more or less kept their currency pegged to the USD so as the USD has fallen sharply this year o has the Chinese Yuan, causing more serious issues with the imbalance between surpluses in China and debt in America. There have been more calls for China to let their massively undervalued currency appreciate, and thereby increase the price of Chinese exported goods and create a more even base in the world. (see article below)
The Baltic Dry Index (BDI) has recently weakened (see graph below).
Global GDP is still low in all the western countries with most of them hovering around 0-2.5%, apparently coming out of recession with hopes for world growth in 2010 to reach 4.5% (IMF forecast)
Australia was the only G20 country that avoided technical recession.
In Australia the best performing sectors for the past 3 months was materials.
Global Interest Rates have not really changed this past 3 months and US long term bonds have also been stagnant in the past quarter. Most Federal reserves have stated that rates are on hold for the foreseeable future; however the RBA (Australia) has led the G20 by raising rates by 0.75% now high relative to the Western countries at 3.75%..
Currencies over the quarter were summarized
by a further weakening of the US dollar--- a currency surely to avoid!!
Oil has risen slightly over the quarter, while Natural Gas rose sharply over the quarter.
Gold has increased eclipsing the magical $1,000 per ounce to reach $1,097.
Copper continued to increase reaching $3.34 per pound.
Soft commodities were generally slightly stronger.
Australian properties are still trading at around 6-8x average salary compared to around 2-3x in the USA and many other countries. This still places Australia as having one of the most expensive property markets in the world.
Commentary – Forecast next 6 months
Whilst the global economy is very slowly pulling itself out of the Global Financial Crisis and subsequent Global Recession, there are still plenty of problems in the world economy and it remains fragile.
The Global imbalances of surpluses in China and the oil nations , compared to the massive debts of USA, UK, parts of Europe, Japan Government debt and Australia etc along with some countries on the brink of collapse (Dubai, Greece, Ireland and Ukraine) , or those that have collapsed already (Iceland), leaves the world economy in a precarious position.
On the positive side Global interest rates in most developed economies are still close to zero allowing consumers to hopefully save and rebuild their household balance sheets and pay down some debt. The credit spreads are getting back to 2007 pre crisis levels allowing the banks to have cheap access to credit, even though the banks are being a lot more careful and stricter on who and how they lend to. A shame the Australian banks have abused the public and used this time to increase their net interest margins, to levels higher than any western country in the world.US house prices have stabilized albeit at terribly depressed prices.
Share markets are likely to consolidate or fall back for the next few months while global economies slowly start to (hopefully) gain traction again.
Investors that hold significant cash should be patient for now and only enter the market gradually or on large dips, however investors who have been aggressively placed to benefit from the recovery should continue to cash up somewhat and lock in some profits just in case there is a second leg down in this 2 year old global recession.
Valuations in all markets are priced for a perfect recovery which remains highly questionable. Most have PEs around 20+ , well over fair value.
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 (nb: Chinese demographics are not so good) and India are preferred.
The Next 11 emerging economies such as Indonesia, Vietnam and Philippines 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 further 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. In particular be careful in Dubai, Greece, Ireland and Ukraine.
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. However, be aware that China is developing some areas of overcapitalization, so go easy investing in China right now.
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.
Globalization of Trade Good or Bad
The last 20 years has seen a massive increase in free trade around the world as all countries by in large agreed to phase out many tariffs and protectionist measures.
Whilst this has been great for those underdeveloped countries such as China who have cheap labour, it has not been so good for the developed countries.
The reason being is that the developed countries have increasingly become reliant on foreign goods and have run up huge deficits to pay for these goods.
The time will someday come where this is no longer sustainable, and what will be the result?
This is not so easy to answer, however it would be safe to conclude that those countries with large debts will see their currencies and global purchasing power fall, and vice versa for the countries with large surpluses.
The best thing to do to combat this as investors is to be sure that firstly you have part of your money invested safely in fixed interest and cash and ideally in the country in which you wish to retire, thereby assuring you have an income stream to live off.
Then, with your other funds try to have it invested in countries that are running surpluses and have sound economies and a current account surplus. Many of the Asian countries are in this category or should be over the next few years.
A sound allocation to emerging markets is also sensible..
To find out more please contact an adviser at email@example.com .
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.