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The Markets - are we on track?

Written on the 30 August 2011 by Matthew Brown, Managing Director, Josman Financial Group

The Markets - are we on the right track?

Over the last month we have seen some significant volatility across our investment markets, the Australian Market has dropped approx. 9% since the middle of July, but we are seeing solid daily gains and more stability in Australia than we are in the US and Europe. Comments by AMP Economist Dr Shane Oliver suggests the risk of recession in the US and Europe is high and Australia is not immune, but is well placed to withstand a renewed global slump. During the GFC, as a result of the impact on confidence, loss of share market wealth, disruptions to lending markets and reduced demand for our exports, Australia wasn’t left unscathed. However, with the Governments “stimulus package”, a strong financial system, strong Chinese export demand, Australia escaped without a recession and has modestly bounced back despite overseas pressures.

How vulnerable is the Australian economy?

Australia is not immune to any renewed global economic slump, the fall in share markets has resulted in a renewed loss of wealth, another global credit crunch will adversely affect lending and exports will be impacted if economic weakness in the US and Europe drags down our key trading partners in Asia. What’s more, the renewed threat to global growth is occurring at a time when household demand in Australia is weak on the back of consumer caution and the global turmoil may only reinforce this. Announced job layoffs are rising – totalling around 9000 so far – and are likely to increase further as companies revise down the demand expectations that underpinned last year’s employment surge. By year end unemployment is likely to rise to 5.5%. Australia’s high house prices relative to income levels and associated high level of household debt is an added source of vulnerability should an economic downturn threaten the ability of Australians to service their mortgages.

As in 2008, interest rates have a long way to fall if need be. While it may take a month or so for the RBA to change its thinking from rate hikes to rate cuts, we expect the combination of increased global risks and rising unemployment to convince the RBA to start cutting interest rates by year end, possibly as early as October. With 85% of Australian mortgagees on floating rate loans, as we saw in 2009, slashing them has a powerful impact on demand. Banks are less dependent on global markets for funding than in 2007, with 50% of funding coming from deposits compared to less than 40% at the time of the GFC, and are far less dependent on short-term funding. In fact, banks are now starting to cut deposit rates as they are awash with cash at a time when credit growth is weak. While households are cautious, they have built up a large savings buffer which they are likely to eat into if unemployment rises and interest rates fall.

We expect to see continued volatility over the coming months and into early 2012, with the market recovery and market and business confidence start to return by mid 2012. This should also see a positive result in investment returns and heading in the right direction over the medium term.

What should you do now? Most of our discussions with clients is about “how can I protect my super and my savings from being affected by the markets going up and down?” Our suggestion is to look at the strategy we use for locking in your gains today and protecting what you have, but still allowing your investments to grow when the market does and also lock in those gains down the track. Talk to us today about how we can help you protect your investments.

Source: AMP Capital Investors – Dr Shane Oliver

Author: Matthew Brown, Managing Director, Josman Financial Group


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