Securinvest Financial Planners

Perpetual's Global Market snapshot – June 2009

• Global shares, as measured by the MSCI World (ex Australia) Net Return Index, declined 16.2% in 2008/2009 in Australian dollar terms. After hitting a low for the year in early March 2009, global markets rallied strongly on the belief that government intervention had restored stability to the financial system and that the global recession might not be as deep and protracted as feared.

The Federal Reserve’s economic outlook over the quarter to 30 June 2009 was cautious, cutting its 2009 GDP forecast and raising its unemployment forecasts. But despite this, there was a noticeable increase in global risk appetite, with credit spreads tightening and volatility indices stabilising. Sharemarkets rallied through the June quarter, and many enjoyed double digit increases.

Risk aversion began to recede during the quarter, with emerging markets outperforming significantly over the quarter. This was reflected in a rebound in commodity prices with oil prices doubling since the beginning of the year.

Financials stocks also performed well following positive earnings announcements from Wells Fargo and American Express. This helped to ease fears of more turmoil in the US financial system. However, capitalisation in the banking sector is still a worry and at least 6 of the 19 largest US banks may require additional capital, according to preliminary results of government stress tests.

Earnings expectations had become so flat, particularly among cyclical stocks and financials, that positive surprises inevitably boosted markets. After months of persistent downgrades, projected earnings have risen slightly. However, in the financial sector this may owe as much to the new flexibility firms have been given in accounting for their losses as an improvement in the underlying outlook.

Overall markets have rallied about 25% from their lows at the beginning of the quarter, but it still remains to be seen whether the early signs of improvement in growth can be sustained. To rally this much, the market may have taken a lot for granted. Governments have administered huge fiscal stimuli but this borrowing still needs to be paid for. That may mean inflation, higher interest rates or higher taxes, all of which would be detrimental for stock markets. Companies also need to raise a lot of additional capital to repair their balance sheets.

The last 12 months has shown that it is extremely difficult to predict the absolute direction of the market. This is not our strategy. Instead we focus on companies with strong fundamentals, strong management and our ability to position the portfolio in accordance with these parameters. Strong management will prove an increasingly valuable quality, as firms are forced to adapt to rapidly changing economic circumstances.

While market sensitive stocks may benefit from short-term swings in investor sentiment, we still think the best investment strategy is to invest based on quality fundamentals at attractive prices.

source: http://images.perpetual.com.au/content/25997_Infocus_issue_3_Sep09/article6.htm