Securinvest Financial Planners

Once again, it is fantastic to see the rebound in both global and Australian equities continuing. Confidence continues to improve across a number of fronts and the colour is starting to return to everyone’s cheeks!

Economy

Following on from what had been a disastrous 18 months and as we have touched on earlier in this newsletter, the economic recovery signals continue to be positive in Australia with building approvals, housing finance and business confidence all on the way up. With a resilient job market, unemployment remains stable and looks like staying well below the original forecasts as we entered into the GFC. Consumer sentiment has risen to 2007 levels, showing optimism returning to households. Although the Reserve Bank of Australia (RBA) has managed to keep official interest rates steady at 3%, the positive signs appearing throughout the economy have resulted in the recent 0.25% rise and possibly further rate rises in the near future. The Australian dollar is back well over $0.80 US, reflecting this prospect as well as the positive outlook for commodities.

There are also signs that the US has seen the end of the worst period of its downturn. Rising industrial output and an improved housing market are flowing through to some economic stability. These signs of improvement have also been evident in Europe and Asia, including China, which points toward a return to global growth next year. The extent of this global recovery will help ensure the sustainability of Australia’s growth through 2010.

Australian Shares

The flow on effect of these improving economic signals and more specifically, the reduction in pessimism that had engulfed investors, has been a rising sharemarket. It was clear that the capitulation of markets destroyed confidence and instilled fear into many investors. The ASX 200 finished the 2008/09 year down 20%. Since March 2009. the ASX 200 was up over 50%. Warren Buffet’s adage of ‘be fearful when others are greedy and be greedy when others are fearful’ had never been so true.

Profit reporting season generally delivered results better than expected with few disappointments. Whilst still down on last year, profits have been supported through reduced costs. A business with a more efficient cost base will further benefit when revenue grows again. Shareholders will be rewarded for staying with these companies during the recovery phase.

International Shares

The 2008/09 year saw the MSCI World Index fall 31% in $US, and lose 18.5% in Australian dollar terms. Markets have since gathered some renewed strength as earning results exceeded analyst expectations, albeit very pessimistic ones. Cost-cutting initiatives by companies played a major role and now rebounding consumer demand is needed to help sustain the improvement. Given improved confidence and the likelihood of better economic conditions, many markets have rallied in recent months with August seeing developed markets in the US and UK up 4.5% and 7.2% respectively. Emerging markets have showed some weakness in recent weeks led by falls in the Chinese sharemarket however, this was more on concerns about asset prices and that Chinese authorities may act, rather than on any economic weakness.

Fixed Interest

The much needed settling of fixed interest markets has begun. The Australian long term bond market strengthened in August, in line with global trends. The LIBOR (ie. the interest rate at which banks borrow from each other) has fallen significantly reflecting the improving trust between institutions and consequential freeing up of money flow around the world. The fall in yields has meant the UBS Australian Composite Bond Index was up nearly 11% for 2008/09. Uncertainty in the growth outlook and benign inflation will likely see yields remain low for the time being. Although, as noted by the RBA Governor, short term rates may be on the way up and this has been reflected in 90 day bills now approaching 3.5%.

Listed Property

The index for Australian Listed Property Trusts fell over 42% in 2008/09, making it the sector hardest hit by the Global Financial Crisis. The recapitalising of most property stocks, improving credit conditions and solid yields have all contributed to a rising index in recent months, up 16% in August alone. Investors are becoming more comfortable with their revised (and realistic) earnings expectations and firm yields on offer. An enormous amount of capital, more than $14bn has been raised in the Australian market, with companies looking to repair balance sheets and reduce refinancing risks. The Global listed property sector has also improved, on the basis that the worst may be over for financial markets and that trusts are still attractively priced.