Market Comments - August 2009
Written by Tony Gray   
Friday, 14 August 2009 10:14

General Comment - 5 August 2009

The Reserve Bank of Australia (RBA) released this comment yesterday: “…the global economy is stabilising after an initial sharp contraction in demand.  Downside risks to the global outlook have diminished; though they have not disappeared… the risk of a severe contraction in the Australian economy has abated.  The most likely outcome in the near term is a period of sluggish output…”  In relation to interest rates, the RBA has switched from an easing bias to a neutral bias.  Most commentators expect interest rate rises in the second half of 2010.  However, I believe there is a high probability that interest rate rises will occur earlier than this – since the RBA would be well aware of the risk of speculative asset price bubbles from keeping interest rates too low for too long – the US experience arising from the last recession. Further, The TD Securities-Melbourne Institute monthly inflation gauge jumped 0.9% during July – the highest rise in the 10 years this series has been running.  If this is followed through, then the RBA will be forced to act early to contain inflation, regardless of the health of the economy – the RBA’s mandate is to contain inflation, not to manage economic growth rates.

Investment markets performed strongly during July, with international and Australian shares rallying strongly.  In the past few weeks the banking sector and some financial stocks have outperformed, taking over from the earlier enthusiasm for energy and mining stocks.  From a charting perspective, the market is forming new (recent) highs and higher lows and is in an up-trend.

With most companies yet to report, it is simply too early to gauge how well many companies are performing and we should have a much clearer idea after reports are released throughout August.  My expectation is that the local sharemarket will encounter a period of weakness after reporting season,  even if results are relatively positive.  This seems to be a typical post-result reaction in Australia, particularly once stocks trade ex-dividend.  Despite the rises in most share prices, there are still plenty of decent investment grade opportunities.  If the market in the short-term was to run on to the circa 4,800 index level (from 4,320 presently) – which represents a rally of circa 50% from the early March lows, it may be worthwhile locking in some gains and modestly rebuilding cash reserves.  There are plenty of ongoing global economic issues and the most likely scenario is that we see a ranging stockmarket, where buying the dips is recommended.  Whilst I am hoping to see a retracement at some point in the next month or two, it is not prudent to remain too conservative (relative to the risk/return profile and target ranges for the portfolio) and as such a continued policy of gradual accumulation is generally recommended.

With respect to international shares, the Australian dollar has appreciated further against most currencies and this has partly negated underlying market increases.  Asian markets have been particularly strong and for the moment I would hope to see a bout of weakness before adding.  I note that the astute Platinum funds management team have locked in some gains and added to cash in the most recent June quarterly report.

The larger listed property trusts have generally edged higher, whilst underlying property values continue to decline.  With most trusts yet to report, we do not yet known the full extent of asset write-downs, but there have been enough individual updates to confirm values will be lower.  However, it is also apparent that lower interest rates are attracting investors and the use of debt and I suspect that non-residential property prices are most of the way through the valuation cycle.  Subject to full year results, I expect that further additions to listed property trusts are worthwhile for most portfolios.

I encourage you to make contact if you have any specific planning or investment queries.

Last Updated on Friday, 14 August 2009 10:23
 

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