Market Comments May 2009
Written by Tony Gray   
Tuesday, 12 May 2009 16:00

It is looking more likely that the Australian sharemarket low of the 8th of March 2009 marks the low-point of the recessionary bear market that commenced on the 1st of November 2007.  It remains possible that the bear market resumes and fresh lows occur, although my feeling is that markets will either pull back on profit taking, but not to fresh lows OR continue to trend higher.

Locally, the three most apparent changes in the last month are:

1. The willingness of investors to participate in capital raisings and especially the larger listed property trusts.  This is important as funds raised from shareholders are applied to debt reduction.  The banks then have an increased ability to extend fresh credit.  This increased availability of credit is crucial to the economy, as many of the trusts and companies failing are doing so as a result of an inability to refinance loans and not due to chronic unprofitability.

2. Investor sentiment.  Even the news of Swine Flu did no more than set back share prices for a week and only modestly at that.  When share prices fail to fall on "bad" news, it signals the end of panic selling and quite possibly the bear market.  Improved investor sentiment was most evident in the rise in share prices almost across the board.

3. The results from the major Australian banks were broadly in line with expectations.  Bad and doubtful debt provisions rose sharply but this was expected.  Underlying profitability and minor increases in net interest margins and increased lending volumes were apparent.  It seems that investors are now looking through the bad debt cycle and all of the bank chiefs were at pains to emphasise bad and doubtful debts would continue to rise through to 2010.

Opportunities

There are a broad range of Australian share investments worthy of purchase and I see significant recovery potential in the listed property sector.  With the Australian dollar rising, in general we are not adding to the international sector just yet, although we intend to introduce Asian focused investments in the medium term.

We have been accumulating distressed listed property trusts for clients with growth or aggressive risk/return profiles and adding to more conservative listed property trusts for other investors.  I expect that the listed property sector will begin rising well before property prices form a base.  Listed trusts have taped the stockmarket for equity and quickly reduce gearing levels.  This is not possible for non-listed funds or directly held property UNLESS the underlying properties are sold - a slow process at present.

The listed property sector is a major beneficiary of an improving credit market and many of the conservatively geared trusts (~30% or lower) are trading at discounts of more than 30% to net tangible asset backing.  Distressed trusts are trading at discounts of 85% to 90%! - that is, they are priced to fail. These discounts represent very large buffers against further property price declines (current property values have already been written down to a significant extend by most trusts).  The main risk for the distressed trusts is that they are forced into administration.  On the other hand, we only need to see one takeover for this sector to rally sharply.

Legislative Risk

It is now widely expected that high income earners and transition to retirement pension strategies will be curtailed in the budget on May 13.  The change of greatest concern is the potential reduction (halving) in the contribution amount that may be claimed as a tax deduction.  Accordingly, for those planning contributions this financial year, it may pay to bring forward those contributions by 6 weeks to May 13.  If you have any questions in relation to your position, I recommend contacting us as soon as possible.

Summary

It is becoming riskier to hold larger amounts in cash if you have a growth objective.  In the medium term, I fear that we will see a breakout in inflation as a result of the slashing of global interest rates and quantitative easing (printing money).  Further, over time the growth of China will also see that country's currency appreciate, adding to the cost of Chinese goods.  This scenario is very negative for bonds (excepting inflation indexed bonds).  Holding inflation hedged assets, such as shares and property proved the best strategy when this occurred in the 1970's.

Please contact us with any planning or investment queries in relation to your portfolio.

Please treat the above comments as General Advice, with no action to occur in reliance upon these statements until we have considered in the light of your financial position, needs, goals and objectives. 

 

Portfolio Management


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