Volatility continues to be the theme in world markets with the intervening period since our last newsletter seeing the market move back up to 12 month highs, only to then fall back in June and July to once again show signs of rising. This is in part due to the mixed signals around the world from a variety of different data that at present indicates economies are growing again, but not at a high enough rate as seen in previous recoveries. Many experts are putting this down to the deleveraging effect taking place worldwide, although some have argued that the leverage has simply been shifted from corporate balance sheets to the Government.
Setting aside the daily ups and downs it is timely to remember that investing is about focusing on the long term, so short term noise should generally be ignored in favour of sticking with your long term strategy. Speaking of long term, it has also been a busy time for the Government and the numerous inquires and committees that have been examining the financial services industry and how it should be reformed for the long term benefit of investors. In the space of the past 6 months we have seen the Ripoll review, the Henry report, and the Cooper review all deliver pronouncements which will affect the way financial services are delivered, priced and paid for. We will be taking a proactive approach in this regard and are currently reviewing how to achieve the best outcomes for clients.
Global Economy
Concerns over the recovery in the US continue to overshadow the global economy with the weak employment market being the primary concern. With an unemployment rate of 9.6% and shedding a further 54,000 jobs in August, the labour market continues to constrain the economy and the pace of growth. This is somewhat contrary to the reporting season, which saw most companies report positive results for the June quarter with most analysts expectations being beaten, although many were cautious in their guidance for the remainder of the year.
The concern over Europe seemed to dissipate somewhat over the past few months with Germany leading the way showing increases in growth, industrial production and redirecting its exports to Asia and Latin America in response to weak demand from traditional destinations of Southern and Eastern Europe. The near panic of earlier in the year concerning sovereign debt seems to have been considered in a more reasonable light and whilst debt levels are very high, these will come down as the Euro zone slowly begins to emerge and build growth throughout the sector.
Whilst on the topic of Germany, we should put some historical perspective of where we are today given that it has long been the engine room of Europe. At the conclusion of WWII 20 percent of all housing in Germany had been destroyed, industrial output in 1947 was only one-third of it's 1938 level and a large percentage of Germany's working-age men were dead. Starting from a very deep hole the Government and the German people rebuilt their economy and less than ten years later the effort was already referred to as an economic miracle. The lesson, as always, is that over the longer term economies will recover and growth will come albeit with some hiccups along the way.
The current 'economic miracle' of China continues to power on however over the past months there have been some signs of slowing. Their economy grew 11.9 percent in the first quarter and 10.3 percent in the June quarter and this is expected to continue slowing for the remainder of the year as a variety of measures designed to cool property prices and wind back stimulus spending take affect. Again, putting this into perspective, their overall aim is to slow the economy to their target growth rate of 8% for the 2010 year, which will still be the envy of most ofthe world.
Domestic Economy
The Australian economy continues to stand out from a worldwide perspective with a low unemployment rate, and interest rates at much more normal levels than the rest of the world. Whilst we are only a small economy in the global scale it was interesting to see recently that Joseph Stiglitz, a former World Bank chief economist and economic adviser to the US government, praised the Government for 'doing a fantastic job of saving your country from problems'. Whilst there is still some mixed data coming through the Australian Economy appears well placed to benefit from the eventual rebound in global demand.
Investment Markets
Markets have rebounded strongly over the past few months following falls in May and June which saw the markets close out the financial year in dismal fashion. This rise in world markets was offset somewhat by the continued strength of the Australian dollar, which has maintained its level of mid $0.80c to low $0.90c over recent times. As noted above, corporate earnings for the past quarter and half where in line or above market expectations although the outlook being somewhat pessimistic dampened the strength of the market rally. We expect volatility to continue for some time as markets adjust to the perhaps lower returns as the 'new normal' in a deleveraged economy.
| Ending August 2010 | ||
| Rolling 3 Months | Rolling 12 Months | |
| S & P 500 (U.S.A.) | -3.68% | 2.81% |
| FTSE 100 (U.K.) | 0.71% | 6.44% |
| MSCI Emerging Mkts | -0.63% | 11.78% |
| Nikkei 225 (Japan) | -9.67% | -15.90% |
| ASX 200 (Aust) | 0.59% | 2.17% |
Outlook
The US economy continues to recover but at a slower pace than in previous cycles and the continued uncertainty surrounding the level of debt on the US Balance Sheet and the options for further stimulus continue to cause concern.
These issues mean that the economy is highly sensitive to negative risks and until there is some positive movement in unemployment it may remain that way for some time. This outlook for the US is likely to feed through to the rest of the world and so once there are signs of stability and consistent data in the US, the rest of the world may quickly follow suit. Of course the Australian economy to date has been the exception to this rule and barring any major shocks should continue to be a leader throughout the developed world.
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