October Review Comments
Written by Tony Gray   
Wednesday, 13 October 2010 16:22


Global and Australian shares advanced through September and early October.  At the same time the Australian dollar and gold prices have risen as the $US weakened.

We attribute $US weakness to the US policy of ‘quantitative easing’ – the newly ‘created’ money is used to buy existing US government debt and drive down bond yields, in the belief that lower interest rates will stimulate the economy.  In fact, this cheap money has driven sharemarkets higher and not fed through to the real economy, since banks are reluctant to lend and consumers and business are reluctant to borrow.  Reducing already low interest rates to stimulate the economy is the equivalent of pushing on a piece of string.  More $US for the same size economy equals currency devaluation – no wonder China has indicated they will not buy any more US government debt.

Fiscally, The US government continues to run a massive budget deficit (through under-taxing and over-spending) in an attempt to keep the economy growing - but this is countered by reduced private sector investment, higher consumer saving rates and by major state government spending cuts.  Something in the order of 40,000 US teachers reportedly lost their jobs in September alone. When the monetary and fiscal actions are put together, the story is looking very much like Japan in the 1990’s – where very low growth, rising government debt levels and deflation occurred.

In Europe, governments have moved more rapidly to reduce deficits and hence the rate at which government debt is rising.  Whilst spending cuts are holding back economic growth and will push some economies (into recession, by accepting the need for citizens to forego government benefits they stand a better chance of returning to sustainable growth sooner.

There are expectations that China will target a lower than historic rate of economic growth as they deal with the environmental challenges of industrialising.  Moderation in demand remains a risk for commodities and hence mining stocks and Australia.  At the same time, commodities are acting as a hedge against $US weakness.

How then to deal/structure portfolios?  We note our comments on each asset class below.

We re-iterate our view that an extended period of subdued economic growth and below average investment returns is likely.  We also expect that a willingness to add and lighten growth linked assets will add value as markets range – as opposed to a buy and hold strategy.

Cash & Fixed Interest

We recommend structuring term deposits with rolling maturities, to smooth interest income and provide regular access to capital.  We are now extending new deposits out to terms of 2 and 3 years.  In the event that interest rates do fall, these new deposits will sustain a higher average income yield.  Should interest rates rise, then as existing deposits mature they can be reinvested at higher rates.

We are revising (positively) our opinion in relation to Australian government bonds.  When interest rates fall, bonds rise in value.  We see large interest rate rises in Australia as unlikely and yet the Reserve Bank of Australia has the scope to cut interest rates by more than any other major developed economy – should this become necessary.  The defensive characteristics of bonds sit well as a hedge for equities and are a topic for discussion when next reviewing the portfolio.

Listed Property

We expect modest growth and income from this sector; there are a limited number of large Australian focused groups with low gearing that rely on rental income, rather than development profits.

International Shares

The rising $A has taken the urgency out of significant new investment.  We note that Platinum have moved to more defensive sectors and reduced exposure to financials and cyclicals.


Newcrest Mining has advanced strongly and whilst we are positive, would be hoping for a fall within the current price range before adding or introducing to portfolios (where appropriate).

As the Australian dollar has advanced strongly, this has offset to a degree the rise in the Australian dollar gold price.  This means it is still a reasonable move to introduce the exchange traded fund (ASX code: GOLD) as a hedge against overseas uncertainty.

Australian Shares

The market is in the upper half of the twelve month trading range.  We continue to see selling and buying stock within the established trading ranges as necessary to outperform in the present market. This is very much an individual portfolio decision.

Please contact us with any queries in relation to your portfolio and/or planning queries.

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 Monday, 25 October 2010 16:30

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