News

Some positive news from Europe

The recent Greek Parliament decision to support the austerity package and subsequent assurances by Parliamentary Leaders means that they can access the funding from Europe.  This is certainly not a permanent solution and can be more likened to Greece having improved just enough to be taken off life support. 

They now need to do what they agreed to do, unlike last time when they agreed, took the funding and did very little in terms of implementing budget changes. 

Additionally China & Japan have both said they will provide funds to help support the Europeans in their efforts to resolve their problems.

This does remove some uncertainty and that is why sharemarkets reacted positively.

Property never goes down: Myth or fact?

When the sharemarkets are falling, the statement that property never goes down is often used to entice or justify a decision to sell shares and invest in a property.

Maybe we are a little insulated here from some events overseas or maybe sometimes we just take in the information we want to hear to support our position.  The reality is that there are many cases overseas and now here, where property has fallen in value.  Japan is an obvious one as is the US in recent years.  We know that Europe is struggling and recent analysis from the All-Island Research Observatory in Ireland produced startling results.  Overall house prices in Dublin have fallen 53.7% between January 2005 and December 2011.

It was not so long ago that the Irish economy was booming and held up as a role model for others.

Yes we are in much better shape than all those countries were, however it is unrealistic to believe that Australia is immune from falls.

Investing is not easy and simplistic statements rarely provide a solution. 

Some key indicators 

The spread between German interest rates and those for Italy, Spain and France – has been narrowing.  This is a good sign and means the latter trio is seen as being a little less risky than recently thought.  See the chart below;

Source: Bloomberg, AMP Capital Investors

The A$ is a good indicator of global growth - if it stays up things are okay.

China – so far so good 

Chinese economic growth has slowed to 8.9%, but there is no sign of a hard landing. Export growth has slowed sharply but so too has import growth and in any case net exports have not been a contributor to growth in recent years. Retail sales growth has held up well and fixed asset investment has slowed only slightly.

Furthermore, falling inflation (from 6.5% in July to 4.1% in December) and a cooling property market, evident by falling prices in 52 of 70 major cities in December, and falls in sales and dwelling starts provide authorities with the ability to ease the economic policy brakes. And there is plenty of scope to ease. Large banks are currently required to keep 20.5%(after a reduction last week) of their assets in reserve, the key one-year lending rate is at 6.6%, the budget deficit was just 1.1% of GDP last year and net public debt is around zero once foreign exchange reserves of US$3 trillion and other assets are allowed for.

After doubling between October 2008 and August 2009 on global financial crisis related stimulus and a growth recovery, Chinese shares fell 38% to the low early this month as investors feared tightening policy would result in a hard landing. With Chinese price to earnings (PE) multiples having fallen back to bear market lows and policy starting to ease again, decent gains are in prospect over the next few years.

Index returns for the 12 months ended 31 January were:

The Australian sharemarket has continued to disappoint compared to the overseas average.  The concept of just buying a few Aussie blue chip shares and holding them has proven to be flawed (another simplistic myth?).  This is despite the cause of the problems being overseas; however it confirms the value of diversification.

We remain happy with the quality of the funds we use.  Our portfolios have been outperforming the averages and providing some protection against the recent falls.  We are confident that if the markets can do what they are meant to do, which is deliver some returns, then we will see excellent results in the portfolios that we manage for you.

John Maynard Keynes tip for investing

Keynes was a leading British Economist and Investor.  He believed that investment success is largely determined by how investors behave at market peaks and troughs as it is where big investment mistakes can be made.

These periods require rational thinking and not reactions to negative headlines and herd mentality.