November Newsletter 2009

A negative month but no alarm bells

• October saw most asset classes lose value. Continuing the trend, our sharemarket continued to fall in early November.
• A fall was expected and to a degree, necessary, as the pace of the recovery in investment markets was, as we have said recently, a little too strong.
• A period of consolidation which will have minor falls of say 5-10% or flat returns can be useful to avoid creating an environment of over confidence and inflated values.
• There has been talk of a double dip recession in the US which will have an impact around the world. It is common for this fear to exist after recessions however it rarely occurs and seems unlikely again this time. Please do not interpret this to mean that the risks have completely passed. They have not. Indeed very careful management of the world economies are needed now.
• We have the US with very high and possibly still rising unemployment. They are talking about keeping rates low as this incredible level of economic stimulation continues.
• China is looking at possibly raising interest rates as they try to protect against the creation of asset bubbles.
• In Australia we are raising rates and our situation is better than expected. The reason for the different approaches is that each country initially looks at the global situation and then its domestic position before deciding on what to do. Each region has its own challenges.

Returns for the last 9 months

The returns for the period 1^st February to 30th October 2009 (9 months) are summarised below

This reinforces the argument that returns can be above average after a severe downturn.  It also confirms how hard it is to try and pick winners and the right time to buy into markets.

No time for complacency

• For some it is easy to forget the events of just over a year ago. It was a frightening period and the consequences are still having an impact. Now is not the time to be thinking that the good times are back and anyone can pick a stock on the market and make money. It is not the time to aggressively borrow personally or for investment.
• We are in different times and caution must be exercised. Look at your loans and have a plan to reduce them or at least to be able to fund higher interest rates. Around 80% of the mortgage loans in Australia are variable. As rates rise this will have an impact on our spending and possibly economic growth.   

Your Portfolio

• Your portfolio must be well constructed and well diversified. Our approach of reducing reliance on the US in favour of emerging markets and non traditional managers is very sound both now and in the long term. Also allocating funds to small companies, if done well can add value.
• We are continuing to work for you behind the scenes and regularly monitor the investments we recommend. We are about to add another fund to our portfolios and have others on close watch. Our criteria include ensuring that the funds we use are either low cost and tied to an index or if they charge higher fees, they must deliver value for that fee.
• Importantly we will continue to manage more than just the portfolios. Monitoring the progress you are making toward achieving your goals, whether it is a retirement target age, an income level or saving tax, is something that we know is important.

Australia not just a great place to live but also a great place in which to invest.

• Asia is fast becoming the engine of the world economy. The growth in that region will continue for a very long time and at an exciting rate. Some points;
  • The Financial Times recently reported that China only has 38 million passenger cars whereas the US has 230 million. The Chinese are buying about a million cars a month, yet only 5% of the Chinese population owns a car.
  • o By the way the majority of the new cars in China are bought with cash. Interesting concept!
  • o China are building roads and railroads at a staggering rate. There is a massive amount of infrastructure being developed.
• Other Asian economies are also experiencing demographic change that is contributing to growth.
• In Australia we benefit from this. China is our number one export partner and we now export more to India than we do to the US. This helps explain why there was much recent media attention around our Political relationship with the Chinese.
• Our relationship with Asian countries clearly protected and limited the damage throughout the recent GFC.
• It also underpins our economic growth to a degree. This in turns helps our companies prosper.
• Growth plus dividends, plus some tax credits make for a good investment and Australia is very well placed to deliver on all fronts.
• There are always risks and high housing prices are a concern, however a growing population is helping in that area. Also, if the RBA overdoes the interest rate increases it could easily create problems and of course the Government has to nurture our relationship with our trading partners.
• It is all a balancing act, but I would much rather face these challenges than those of the US and much of Europe.

Self Managed Super funds are becoming more popular

• According to the Australian Taxation Office Self Managed Super Funds (SMSFs) are now the largest and fastest growing segment of the super industry.
• Our firm combined with our Accounting Practice has all the skills and experience you need in this complex area. We can advise on whether a SMSF is right for you, , set it up, provide investment advice, recommend a stockbroker, provide insurance advice, prepare the Financial statements, Tax Return and the Audit.
• We manage around 200 SMSFs
• We are currently running free seminars on SMSFs. They will be presented in our Boardroom by the Accountants at MG. For more information please contact shonaanderson@mcmgroup.com.au