One thing that I do know for certain is that we are going to be bombarded by a range of headlines from the disastrous to the cataclysmic. There is going to be in-depth and continuous ‘up to the minute’ reporting on daytime tabloid television and newspapers. Histrionic politicians are going to be doing their best to attribute any negative news to the other side and talk up worry and concern for their own political motives. Koshie will be in our face every breakfast breathlessly explaining every detail of what happened overnight in the US.
The recent falls on the share market in the US, Europe and here don’t have just one trigger. There is concern about bonds in Italy and also with the debt debacle in the US. The political situation in the US has unfortunately, some similarities with the situation here. There seems to be two sides hell-bent on winning a political game at the expense of the economy and actually running the country and getting legislation passed so business can get on with doing business. The Reserve Bank actually made comment last week (and before the recent falls) referring to ‘the bitter political debate damaging confidence in the economy’.
Although not immune, Australia is placed in an extremely strong position to cope with any fallout from the US and European situation.
Here are some facts – try to ignore the spin you hear
· Although you wouldn’t think so by the amount of political discussion, debt is actually extremely low. 7% of GDP is one tenth of the average of other western economies. Think of your mortgage compared to your income.
· Our banking system is profitable and well regulated.
· We have very low unemployment.
· Interest rates are high, allowing for multiple cuts to stimulate the economy (spending) if needed.
One of the reasons that the Australian dollar has been getting stronger over the past period is that it has been seen as a safe haven – high interest rates and inflows have pushed up the currency. We are now seen as part of the three ‘shadow currencies’ and an alternative to the three traditional currencies (US dollar, the Yen and Euro). The world is viewing us as a way to gain a benefit from the growth in China with a far lower risk. And to quote the Governor of the Reserve Bank, the income we get for our exports compared to our imports was “the biggest gift the global economy has handed us since the gold rush of 1850”.
One of the outcomes from the GFC was that everyone reconsidered their level of debt. Consumers were no longer spending everything (or more!) than they earned. They were actually saving and paying down debt. This increased savings rate has been significant (over 10% of income) and makes great sense. However, because they weren’t spending anywhere near as much, the retails sector has hit the skids. This is likely to change when we are happy again with our savings and debt levels.
What about my investments?
Although they can be very unsettling, large market swings, crashes and rebounds are (unfortunately) a part of investing in any growth investment, shares or property. Often the PRICE of a share (what someone will buy it for at that moment) is different to the VALUE (what the company will earn and pay in dividends in the future). For example the NAB or Commonwealth Bank didn’t suddenly make 4% less profit on Friday. The US falls didn’t really have a significant impact on profits, but it did on the mood of people selling. Although we are certainly not immune to a European debt crisis (nothing new) or low growth in the US, we are actually economically and regionally part of Asia. That is where the world growth is going to come from.
We can change the amount in each sector, although making large reactionary asset allocation changes when markets are down is rarely a good idea.
There is sometimes an opportunity to buy if prices are lower, but if we move the other way – by selling shares and move to cash – we are selling low and as a result guaranteed to miss out on the recovery. If the downturn requires more growth, then interest rates will fall. The most important issue to consider is time frame. If the time frame for your investment hasn’t changed since last week, it probably isn’t a good idea to react. If however, the volatility is causing significant concern – the ‘sleep at night’ factor - then maybe the portfolio should be more conservative and it can be reweighted to include more defensive assets such as cash, term deposits and fixed interest. The issue here however, is that IF the economy needs to be stimulated, interest rates will fall and possibly fall quickly. Many overseas markets have interest rates of less than 1%.
One interesting point here is that the dividends that the banks are paying on their shares is significantly higher than the cash rate and even higher than term deposit rates.
It is going to be a volatile and testing time until some of these issues are resolved. The market mood (like crowd behavior) can swing wildly. It is likely to fluctuation between fear, where any good news is ignored and bad news is reacted to, and opportunity where investors feel confident to buy as prices become ‘bargain basement’ and too good to refuse.
Warren Buffett was quoted yesterday as saying: “Financial markets create their own dynamics, but I don’t think we are facing a double dip recession. Clearly, what stock markets do have is an effect on confidence and this selloff can create a lack of confidence.”
Nobody can pick the tops or bottoms of these swings as you can’t pick reaction and mood. The best thing is to carefully consider if your actual circumstances have changed or your long-term strategy has changed.
If these things are still the same, then it is probably best to hold tight. Once the current storm dies down, that is the time to revisit and make changes to the assets if required.
If you have concerns and would like to discuss your current portfolio or situation, please send me an email and I will give you a call.