Don’t Follow The Herd
Over the past few weeks we have been asked our opinion on what we believe is occurring in the Australian markets, below we have summarised our thoughts (plus additional research by MLC and Macquarie Bank) and also put together the answers to some common questions we are being asked.
The Australian market continues to be volatile and extremely focussed on the issues within Greece. This fear has pushed share prices lower however the dividends are improving as company earnings, for the most part, improved during the August 2011 reporting season.
Whilst the turmoil in Europe is not to be ignored, investors should be trying to look past the short term and if they are comfortable with the earnings of the businesses they own (or are considering purchasing), they need to decide whether they prefer to buy now when things are cheap or at more expensive prices when things look “clearer”.
Why has the Australian Dollar fallen recently?
With the Australian Dollar falling below US$0.95 it is at its lowest point since September 2010. The value of a currency is impacted by a vast array of information, and the latest movements in our currency are no different with a range of issues including:
- Growth concerns in China impacting demand for Australian exports;
- The ongoing European debt issues; and
- A general sense of risk aversion that is boosting demand for so called safe haven currencies like the US Dollar.
Will the Australian Dollar bounce back?
Trying to predict where the Australian Dollar is going to go is very difficult. Whilst it is probably considered to be very close to normal levels now rather when it was US$1.05 – US$1.10, it could definitely rise and fall again.
To give you some perspective, a year ago the Dollar was at US$0.98, 13 months ago it was at US$0.9450 and in 2008 it was at US$0.60.
If Greece defaults, what does it mean for me?
It is hard to determine what the exact impact of Greece defaulting will have on share markets around the world, however there are a number of key factors you should keep in mind:
- The market has known for while that there is a high probability of Greece defaulting and therefore, to a large extent – it has factored this in already;
- Whilst there is no guarantee the markets won’t be impacted should Greece default, some of the impact has already occurred within the markets;
- Greece’s debt levels are unsustainably high because in reality, Greece is a small country. There are other surrounding countries like Germany and France who can absorb Greece’s debt and soften the impact on global share markets of a potential default.
What about moving my investments into cash?
Whilst Term Deposit rates seem attractive at the moment, it is important to be wary that current market conditions could mean a potential decrease in interest rates (Macquarie is predicting the rates to decrease by 1% over the next 12 months). Adding this element to an increasing inflation rate, it could mean you are losing money by investing in a Term Deposit.
Below is a summary of our views on the Economic outlook:
- Global growth is still strong at around 4%;
- The US is still growing and with $2 trillion on private companies balance sheets this growth should remain;
- US reporting season starts next week and earnings should hold and may surprise investors with positive results (excluding investment banks);
- In Europe it seems as though a solution around Greece is nearing but more importantly it seems European banks are being encouraged to recapitalise balance sheets;
- The Australian market is pricing in around a 1.00% cut in interest rates next year (official rate down to 3.75%); and
- There are no signs of a housing market crash even if Unemployment rises into the 6%’s (which is Macquarie’s forecast). Unemployment was around 11% in the early 90’s and this had no major effect on the residential housing market. Some areas will suffer but have specific problems i.e. Gold Coast has an oversupply and lower tourism.
As you can see, although the markets are volatile at present, the foundations are in place for an economic recovery.
The media will always present a bad news story over a good news story – because it gets more attention.
Beware of the hype and contact us should you have any concerns.
Chan & Naylor Financial Planning
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