June Review Comments
Written by Tony Gray   
Tuesday, 08 June 2010 00:00

General Market Comment

The Australian sharemarket and global markets fell sharply during May and in June uncertainty and strongly negative and positive days have become the new normal.  The media has focused on a number of real concerns about the global economic situation, but you have to search hard to find articles that highlight positive outcomes.


It is true that European governments have a debt and deficit problem.  The International Monetary Fund and European Central Bank plan to cover the re-financing risk for countries such as Greece, Spain, Portugal, Italy and Ireland does buy time for these economies to cut unsustainable government spending – at the likely short and medium term cost of sending their economies into recession.
But consider the positives – more than 70% of the Eurozone economy relates to the much stronger northern economies and weakness in the Euro is benefitting Germany especially when it comes to exports.  German industrial production is 13% higher than a year ago (measured to the end of April) and it is likely that they will move to a balanced budget position within a couple of years.  Apart from areas such as Spain and Ireland that have overbuilt housing, the rest of continental Europe has not experienced a housing bubble.

United States

The US economy has been shifting from reliance on government spending to reliance on private investment for some time now.  Employment growth numbers recently disappointed, but growth in employment has lagged recovery in that economy in previous cycles.  The US has a large budgetary deficit and government debt levels are expanding to high levels.  The government continues to shift from stimulus spending to fiscal responsibility though – with all departments directed to cut spending by 5%.  As with Europe, this will constrain economic growth, but over time should improve consumer, business and investor confidence.

Asia & Emerging Markets

The developing world is expected to represent more than 50% of world economic production by 2020 and much of this relates to growth in domestic demand.  Many of these economies have low levels of government debt and have proven to be less reliant on developed economy growth than in earlier global downturns – particularly post the 1997 Asian crisis.
Brazil, the eighth largest economy in the world, is growing at 9.0% year on year and China is intentionally slowing their economy to curtail inflation and especially property speculation.  It is important to note that it is the rate of investment in China and not the rate of economic growth that is important to Australia.  A fall in investment (roads, factories, buildings etc) relates to demand for commodities such as iron ore, coal and copper – and this has relevance to metal prices.

Metal Prices

Stockpiles for metals such as copper, aluminium, nickel, zinc and lead have risen to their highest levels since the mid 1990’s.  For those that remember the 1997 to 1999 decline in metal prices that can be associated with high stockpiles - and the impact on mining company profits and share prices; the risk of holding too much exposure in this cyclical sector should not be ignored.
Metal prices have fallen sharply since early April and if they do not recover, analysts will begin downgrading 2011 earnings forecasts.  The curious fact in Australia is that our mining stocks have generally not fallen as much as those in other commodity producing economies such as Brazil and Canada!  This is despite the unquestioned impact from the resource super tax on valuations.  Exactly why this is, I’m unsure – but it does suggest the risks still lie to the downside for the mining sector.


Investors and business are clearly less confident about the local economy and much of this can be attributed to concern about government policies.  There is also the reality that falling global sharemarkets suggest that economic growth will be slower than earlier expected for 2010 and 2011.

An environment of slower world growth – expected due to reduced government spending and a focus on managing sovereign debt and deficit issues – is likely to reduce company profit growth.  This may be reflected in lower than average price to earnings multiples.  In other words, cheaper than average share prices relative to earnings is a rationale outcome.


Despite an expectation of slower global growth, I doubt that we will see another global financial crisis emerge in the short-term.  The negative issues considered above provide a reason as to why prices of Australian and international share and property prices have fallen.  The actual risks are no different from two or four months ago – it’s simply that share prices now more properly reflect a risk discount.

Since most portfolios are overweight defensive cash and fixed interest classes relative to investment strategy asset ranges, we generally recommend applying some funds to the purchase of additional growth assets at current levels.  We are hoping to see compelling value emerge in coming weeks – but are not willing to risk missing out on investing at levels that are fundamentally justified.

The following chart illustrates where we feel the sharemarket is in the current cycle (circled).  After falls from late 2007 to early 2009 and rally to early 2010, we now expect the market to trade in a gradually rising range for an extended period – presenting opportunities to add or lighten equities.  This represents a similar outcome to the latter half of the 1970’s and post 1990’s recession.

Current Cycle Position 

Planning Issues

A focus on investment portfolio adjustments post the Federal budget and Henry Review government response has delayed our review of planning issues for some portfolios.  There are a number of important issues to be aware of, especially in relation to superannuation.

Contribution Limits

Maximum tax deductible (concessional) contributions to superannuation are capped at $25,000 for those under 50 years of age and $50,000 for those at least 50 years of age.  Any contributions in excess of this will attract penalty tax of 31.5% in addition to the normal 15% contributions tax (i.e. 46.5% tax in total and the same as the top margin tax rate).  Importantly, any excess contributions are also counted as a non-concessional contribution.

Non-concessional contributions (where no tax deduction is claimed) are limited to $150,000 per annum; or $450,000 per annum over 3 years (bring forward rule) for those under 65 years of age.  Any contributions in excess of these limits are taxed at 46.5%.  It is therefore possible that excess concessional contributions that also exceed the non-concessional limits will be taxed at 93%!  The tax commissioner has NO discretion in the application of tax where the contribution is intentional but inadvertently breaches the cap.

Accordingly, please ensure we are aware of all contributions that have been made in the past three financial years when considering your superannuation contribution arrangements.

Please contact us with specific investment and planning queries.  We have identified a number of specific growth assets that we have not been able to buy at justifiable levels previously.

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 08:28

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