September Review Comments
Written by Tony Gray   
Sunday, 19 September 2010 08:30

The sharemarket has staged a modest rally so far in early September and this has lifted the Australian market into positive territory over a 12 month period – but still well off the peak of April.  The chart below shows the daily price movement for the All Ordinaries Index from 1 September 2009 to 14 September 2010.  I have added the lines as a guide to the ranges I expect the market will trade within. 

 

All Ordinaries Index – 1 September 2009 – 14 September 2010
 
All Ordinaries 
 Source: Iress
 
The chart suggests we are at the mid-point of a very gradual up-trend for the local sharemarket.  We expect markets to continue to range up and down for an extended period – presenting opportunities to lighten and/or add to equities.
 
International shares have traded in a very similar manner to the Australian sharemarket since 2003 and the following chart sets a common base for the Morgan Stanley Capital Index (MSCI) - representing international shares and the All Ordinaries Index - representing the Australian sharemarket.
 
March 2003 – September 2010 – Common Base – All Ordinaries vs MSCI

 Common Base
Source: IRESS
 
It is remarkable that given all that has been written about Australia’s economic outperformance and benefits of the rise in iron, base metal and coal prices, that we are still so highly correlated with international share markets.  The outperformance from the low of the 2002/03 bear market in March 2003 to the present is only 16% over a 7.5 year time frame.  This does not take into account the benefits of higher dividends in Australia and the value of franking credits.
 
Listed property has gradually added value over the past 12 months and we expect this sector to continue as a steady performer, with modest growth and moderate to high income yields.
 
Term deposits remain good value relative to bonds.  In fact most investors are receiving slightly more from at-call bank accounts than from 10 year government bonds!  Term deposit rates have eased slightly over the past 9 months and the extra interest moving from a 6 month to a 36 month deposit is perhaps 0.2% p.a.
 
Locking away some funds in longer dated term deposits is prudent given the fall in bond yields in Australia and overseas – which suggest a weaker economic outlook and the possibility of falling interest rates.
 
The Australian dollar has continued to strengthen and metal prices have partially recovered the falls of April and June.  Gold prices continue to trend higher.
 
The reporting season contained only a small number of negative surprises for us and by and large we are comfortable with valuations for a wide range of companies.  It is our opinion that the very real problems with overseas government deficits, high government debt levels and demographic challenges from an ageing developed world and China will be recurring concerns for investment markets.
The restriction of credit due to the Basel 3 banking reforms could have a serious impact on the Australian economy by increasing the cost of overseas finance.
 
On balance, we continue to add growth assets selectively to portfolios, add more term deposits and run down cash reserves.  We also expect to lighten exposure to growth assets within the established sharemarket range – seeing this as the most likely means of outperforming over the next couple of years.
 
Please contact us with any queries in relation to your portfolio and summaries for the 2010 financial 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.

Last Updated on Sunday, 19 September 2010 08:49
 

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