Market Comments June 2009
Written by Tony Gray   
Tuesday, 09 June 2009 12:41

Investment Markets - June

The recovery in Australian shares, listed property and international shares has been remarkably swift and sizeable, although perhaps not so remarkable when viewed in comparison to some other recessionary bear markets (see UBS's Bear Markets, Bear Market Rallies and Market Bottoms under Tony's Desk on the website).  World events and reaction still seem closest to the 1970's where the Australian All Ordinaries Index rose 56.5% in twelve months from the early 1975 low.  By comparison the Australian share market has risen more than 30% in 3 months, the US has risen more than 40% and Asian markets have rallied more than 50%!

The Australian dollar has in the past 3 months risen at the fastest rate since floating in 1983 and this is in fact a negative for local economic growth (undercutting our competitiveness).  Our currency has been strong against all currencies, but particularly the $US - or perhaps we should say that the $US has been weak against other currencies.  The United States have severe structural problems in their economy that will restrain economic growth for an extended period.  The situation where the US Central Bank creates money to buy and cancel government debt is occurring at the same time the Treasury is issuing new bonds to finance their massive deficit.  Investors are not stupid and are demanding higher income returns to compensate for the inflationary risks arising from this policy.

International Shares

The Australian dollar has now appreciated to the point where it is safer to direct some funds to this sector (from a currency perspective).  It does seem that US markets have advanced too far given the gravity of their economic position and hence my focus is on exposure to Asia as a long-term growth region, with typically sounder balance sheets - which is a key competitive advantage at this time.

Listed Property

Recapitalisation of most of the major trusts has occurred and I expect to see a wave of consolidation as those with strong balance sheets buy up distressed property trusts at a fraction of asset backing.  It is well worth accumulating investment grade trusts in portfolios for yield and further capital recovery in light of the large discounts to written down tangible asset values.  Investors or traders with a more aggressive risk/return profile may consider picking up a range of distressed property trusts for potentially very strong gains.

Cash & Fixed Interest

Long bond yields have risen sharply since January (both in Australia and the US) and signal that bond markets are anticipating higher interest rates in future - quite possibly due to the risk of rising inflation.  Accordingly, term deposit rates are starting to rise.  I doubt cash interest rates will rise in the near-term.

Long-term, the risks of holding larger amounts in cash and fixed interest are rising, since these assets suffer when inflation rises, although the lift in income yield will initially be welcomed.  In the short-term, any bond or bond fund exposure should ideally have short duration (i.e. be close to maturity).

Australian Shares

Commodity stocks have risen very strongly due to stockpiling in China and a rapid turnaround in that economy.  I question the sustainability of this rally if we accept the viewpoint of slower long-term global growth, in light of the debt burdens of developed economies, ageing populations and ultimately a rise in taxation.  There is also the economic fact that commodities do not generate large long-term profit margins, the high profit margins from 2004 to 2008 were a  short term phenomenon due to the long lead times to increase supply following increased demand and an extended period of underinvestment in new mines.  There is absolutely no sign of supply shortfalls for metal markets that will support sustained price increases.

The situation is different for energy stocks, where there are supply limitations relative to demand that ultimately support rising prices.  This is reflected in a premium price for the major Australian energy stocks, although some smaller companies appear quite cheap.  There are a number of stocks in the mining and energy sectors and it is prudent to have some exposure in most portfolios (we can discuss during our next review).

It is evident that some of the more defensive stocks on the local market have not participated in the market rally, as to be expected, since they are treated as a source of funds to buy into the recovery potential of other stocks.  The valuations of CSL Limited and Woolworths have been improving as time passes and exhibited modest price weakness.  These stocks now represent the safest value for some years, although they are not yet bargains (and may not become).

Our view remains that investment markets will recover well in advance of the broader economy and it is becoming increasingly likely that we are in the early stages of a recovery, rather than the late stages of a bear market.  In either event, there are a decent range of stocks representing sound long-term value.  I continue to recommend an approach of gradual accumulation, whilst holding reserves should a bout of weakness bring prices back to levels where price alerts are triggered (again, during our next review we will discuss and revise the alerts set for your portfolio).

Please treat the above comments as general in nature, with no action to occur in reliance without first seeking advice personal to your position.

Last Updated on Saturday, 18 July 2009 23:05

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