Quarterly Newsletter - April 2010
Major Indices (as of 30/03/10)
* PE ratios (based on historical
Commentary – Past 3 months
Third Quarter 09/10 financial year saw most share markets globally move sideways or rise very slightly as global confidence strengthened slightly despite the debt woes in Greece and Dubai etc.
An exception to this was the Hong Kong Hang Seng and the China CSI 300 which both declined. Probably due to the fact they were a bit overvalued and concerns about rising interest rates in China.
Global exports have improved as has global unemployment (US in particular), hopefully suggesting the worst is behind us.
The US will likely report positive ‘non-farm payrolls’ figure of 190,000+, that is employment growth in April which will be the first growth in US jobs in almost 2 years. This is a very positive sign that the world economy is recovering, albeit with Government stimulus.
China continues to do well, helped along by their massive Government stimulus, and some recovery in exports. An IMF GDP forecast for 2010 of 10% growth is quite incredible in the current world climate.
India and other parts of Asia, especially South East Asia are going along very strongly, oblivious to the Western world’s woes.
The Baltic Dry Index (BDI) has recently weakened, but only slightly to 3,021.
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 4.0% (IMF forecast)
Global Interest Rates ave not really changed this past 3 months while US long term bonds rates have started to rise. 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 1.0% now high relative to the Western countries at 4.0%. India has also raised rates, signaling a strong local economy there. China has talked about raising rates.
This again shows Asia is on the rise while the West is still struggling.
Currencies over the quarter were summarized by a weakening in the Euro. The Australian dollar (AUD) rose compared to all major currencies with only the Indian rupee outperforming it.
The past year did see a good rise in the lower priced housing particularly in Sydney and Melbourne thanks largely to the first home buyer’s scheme.
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 making it hard to see property prices going upwards. It is more likely to have a decade of moving sideways.
Commentary – Forecast next 6 months
The Global economy and in particular the US is showing some positive signs and the return in the US to employment growth and not job losses should help boost share markets globally. Of course as the stimulus is wound back we will have to see what happens to the jobs situation and economy.
The Baltic Dry Shipping Index is slightly negative and US Retail sales forecasts are fairly stagnant. Suggesting any recovery will still be weak.
Share markets are likely to move sideways or rise in the next few months while global economies slowly start to gain traction again based on some positive employment news in the US.
However, most markets PE ratios suggest corporate earnings need to increase substantially with the recovery otherwise share markets are definitively still overvalued.
Investors that hold significant cash should still be patient for now and only enter the market gradually or on large dips or phase back into the market over time; 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 of around 15.5 historically.
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 in some respects) and India are preferred.
The Next 11 emerging economies such as Indonesia, Vietnam and Philippines should do well over time.
The emerging economies that are well managed such as China, India and SE Asia and parts of Africa and South America 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.
US Employment to rise for the first time since the GFC began
It is expected that the March US Non-Farm payroll numbers will show about 190,000 jobs or more were created last month in the US. This is a great sign that the world economy is improving and that the US is at last out of recession. It bodes well for global recovery of the economy. Let’s just see if the employment pick up can be sustained in coming months.
China OK for now, but has an aging population
The Chinese economic miracle of the last 3 decades has largely been due to the urbanization of the population. That is, each year in China around 40 million people move from the country to the city to find higher paid work and a better life.
Going forward what are the positives and negatives for China?
The positives include:
The negatives include:
Demographics – The importance of demographics when investing
If a country goes through a stage of bad demographics it can have
profound effects on share markets and the wealth of individuals and
Example 1: Japan 1990 – Declining and ageing populations combined with a property and share market bubble in 1990 caused the Japan stock market to fall for the next 20 years, and the economy to stall.
Example 2: US, UK, Western Europe 2007? ageing of the baby boomer generations in much of the developed world caused these economies into a spiral of less savings and more debt as the younger generations struggled to buy the overpriced property and share markets following the boom years in the 1980s and 1990s. This along with poor lending practices lead to the Global Financial Crisis in the developed economies that we are still suffering from.
NB: Barclays Capital produced a chart showing that for the past half century, the earnings multiples on US equities has faithfully tracked the proportion of the population aged from the mid- thirties to mid-fifties.
Solution for investors:
Existing clients of HNW have already started to do this by taking considerable exposure to Asian shares, and Emerging markets.
Palawan Philippines property developments update
Just a quick update on the property development projects here in beautiful Palawan Philippines.
I have recently been in Port
Barton Palawan and have inspected the lands and fencing etc.
last purchases bring the land bank to approximately 26 hectares
of prime land.
The new airport 10 km away in San Vicente is now almost 80% complete with the runway finished and work soon to begin on the terminal building whilst tourism in Port Barton is booming with the town hotels fully booked and being forced to accommodate people in tents. Hopefully the last 22 km of road into Port Barton will be concreted in the next year, to complete the major infrastructure works in the area.
The Condos will mostly have spectacular views of Port
Barton Bay and be set high on the headland hillside
coconut trees and off course a beautiful swimming pool
for you to relax in after a day of work or pleasure.
Currently one Australian dollar buys around 40 Pesos, so a 1 bedroom unit at 3m Pesos is $75,000 Australian dollars.
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.