December Review Comments
Written by Tony Gray   
Monday, 14 December 2009 13:49

Overseas Economic/Market Comment

The broader financial picture for most overseas developed economies remains depressed, but with encouraging signs from the United States that rises in unemployment may be coming to an end. A recovery in employment and US housing prices could be a very powerful catalyst for a stronger recovery in the global economy during 2010. It is much cheaper to buy a house in the US than to build and interest rates are so low that most investors are getting perhaps 0.1% or 0.2% p.a. interest for money on deposit! – a rise in property values would be a major confidence booster for consumers.

A recovery in the US would see a stronger $US and a correspondingly weaker Australian dollar. International sharemarkets already seem to be pricing in a strong recovery in company profits.

There remains a risk that government or corporate debt default triggers a correction in markets – which is reflected in the following asset class commentary.

Cash & Fixed Interest

The Reserve bank of Australia continues to raise interest rates, with three 0.25% rises occurring in October, November and December – to bring the official cash rate to 3.75% p.a. The banks are lifting deposits and loan rates more rapidly as they battle to attract depositor funds to meet loan demand.

Term deposits for 12 months have jumped sharply in the last month, with both Westpac and National Australia Bank offering 6.8% p.a. Compared to expected inflation of around 2.5% p.a. this represents a very high real interest income return.

Gold Fever

The price of gold has been rising strongly for some years now and presently stands at $US 1,156 per ounce, although in local currency terms the price is still below February 2009 peaks due to a 50% rise (recovery) in the Australian dollar.

The value of gold differs from investor to investor. For years we heard that gold was bought in times of inflation – and yet it did not pay any income and looking back I cannot see any strong correlation with inflation since the late 1970’s.

My email broadcast establishes why I see some form of gold exposure in portfolios as a valuable hedge against further financial instability overseas. The long-term price trend outlook for gold is rising due to mine supply issues and net buying by central banks.

A short-term pull-back is a possibility due to optimism about the US economy and I anticipate this will present an opportunity to acquire gold, gold exchange traded funds or shares in gold miners.

Growth Assets

As interest rates and inflation declined from the early to mid 1990’s this generated returns well above average for both bonds (fixed interest) and growth assets – so even time periods as long as 15 and 20 years record returns much higher than can reasonably be expected in the future.

A Credit Suisse analysis shows that Australian shares generated the highest return of ALL global sharemarkets over the past 100 years – at around 7.0% p.a. after inflation. By comparison, after inflation bond returns were not quite 2.0% p.a. Assuming the Reserve Bank are successful in keeping inflation within the 2.0% to 3.0% p.a. target band and that the very long-term returns are maintained, this suggests long-term returns of 4.0% to 5.0% for fixed interest and 9.0% to 10% for Australian shares.

These returns are probably lower than you are hoping for. Right now, US share investors have received a zero return over 10 years and Japanese investors would be pleased with that outcome!

Summary

I continue to recommend a reasonable exposure to growth assets, but reduced in comparison to the past 12 months. A greater allocation to fixed interest (in preference to cash) is recommended and introducing a gold hedge of some form may be appropriate and is a topic for discussion in relation to your portfolio.

I encourage contact prior to the Christmas break in relation to investment matters. In the new calendar year we will be reviewing financial planning issues ahead of the May Federal budget and in light of the various taxation and superannuation reviews currently underway.

Merry Christmas and best wishes for the new year,

Please treat the above comments as General Advice, with no action to occur until we have considered with reference to your financial position, needs and goals.

 

Portfolio Management


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