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21 November 2011

Industry Fund Financial Planning in conjunction with Frontier Investment Consulting are pleased to provide this month's video Market Update:

This Market Update includes the following:

The uncertainties related to Europe
Markets that are starting to recover
Growth in the Chinese economy in 2012
Why the Reserve Bank may be in a position to cut rates in Australia?

>> Read the transcript below

Now that you've watched the video, what should you do?

To some degree, all individual investors are averse to risk; however, an individual’s risk tolerance is a relative rather than absolute issue.

With the current glut of bad news and market volatility, many individuals are starting to question their current portfolios or superannuation investment(s). However, this needs to be kept in perspective as there has always been a relationship between risk and reward, ie. aiming for higher returns means accepting higher risk, especially in the form of volatility in the short term.

Attempting to avoid risk or losses by jumping in and out to "time the markets" will most likely not work. Studies demonstrate that both amateurs and even professionals are not very good at market timing.

Therefore, you should take this chance to review your personal investments in the context of your financial objectives and risk appetite, not short-term market performance. If your personal circumstances and investment goals are unaltered, you should stay committed to your long-term plans. If you don’t have a ‘financial plan’, now is a great time to develop one in conjunction with an authorised Industry Fund Financial Planning Adviser.

Developing or reviewing a financial plan will help you to:

Crystallise your long-term goals
Review your time frame and retirement needs
Implement a savings and investment plan
Discuss and review your individual appetite for risk, ie. your Risk Profile. This will allow you to implement investments that are appropriate to you

This information is of a general nature only. It has been prepared by Industry Fund Financial Planning without taking into account your personal objectives, financial situation or needs. Read full disclaimer

Transcript:

Rob Hogg, Senior Consultant, Frontier Investment Consulting

There are several things I wanted to speak to you about today, and probably the most important of them all is Europe.

There are enormous uncertainties related to Europe, and we’ve seen in most recent weeks that markets are becoming increasingly concerned about the situation in Italy. This follows on from concerns earlier in the year about Greece, Portugal and Ireland. The current concerns are probably more serious than the others in the sense that Italy is a much bigger economy. One of the reasons markets are so concerned about what’s happening in Europe is not just that Italy is a very large economy, but it’s also the great uncertainty that’s related to the political process. Markets don’t have much experience in trying to factor in the risk from political uncertainty; instead they have a lot of experience in looking at trends in the macro economy, trends in economies, growth and inflation, and the usual policy responses to those sorts of underlying fundamentals. So that’s one of the reasons why what’s occurring presently is causing so much uncertainty and causing quite a deal of volatility in markets.

But just in the last couple of weeks, whilst volatility has continued and uncertainty remains very high, outside of Europe a number of other markets are starting to do fractionally better. In the United States for instance, the last couple of months has seen slightly better reports on growth for the US economy. We’re not suggesting that the US is recovering sharply or returning to anything like its longer-term trend rate of growth, simply that’s its growing slightly faster than it was earlier in the year, and that is certainly a positive. There does remain the risk, however, that all the uncertainty in Europe could have an effect on the US economy, but to date things in the US do look a little bit better.

Elsewhere across emerging markets in general, the story there is unfolding in a reasonably positive way as well, and here we can look to China as a good example of what is occurring amongst emerging markets. In China some of the recent numbers that have been released suggest that whilst the economy is still growing, it’s growing at a slightly slower pace, which is a positive, and also that inflation pressures there are starting to slow as well. These two factors suggest that rather than tightening policy and trying to slow the economy, authorities in China might be able to do something about easing some of the constraints they’ve placed against the economy, and actually, that type of action would suggest that growth in the next year or two would probably be a little bit better than would otherwise have been the case.

So again, whilst Europe is very uncertain and there are very significant risks in Europe, things can still go quite horribly wrong. In other parts of the world, generally things are going better than earlier in the year, and in most cases better than investors had expected.

So when we look to see what the market’s reaction has been to all of this, yes, there is still volatility but it is a little bit less than there was a month or two ago, and markets are becoming a little more discerning about areas where they see the most risk. Clearly, looking at Europe, that is where markets are seeing the most risk and they’re becoming just a little bit more comfortable with the US and the story across emerging markets.

Turning to Australia, in the last couple of weeks the Reserve Bank has cut interest rates. That’s the first time they’ve moved on interest rates in a year. The last move, just before the Melbourne Cup in 2010, was an increase, and the reason that the Reserve Bank is now in a position to make these cuts is a little like the story in emerging markets – growth here is a little bit softer, inflation pressures here are a little lower, and generally that’s a reasonably positive background. Indeed, it’s possible the Reserve Bank may move to cut rates again if we see further declines in inflationary pressures and ongoing two-speed economy as we’ve seen now for quite some time.

So, to try to put all this together, there remain very significant risks in Europe and really no one knows how that is going to turn out. But, even with those significant uncertainties, the story in other parts of the world is actually starting to get slightly better.

The transcript and video content above have been provided by Frontier Investment Consulting Pty Ltd. Read full disclaimer

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20 October 2011

What has happened since our last update?

Markets have continued to exhibit heightened levels of volatility over the past few weeks, generally responding positively or negatively to events unfolding in Europe. The most important issue in Europe continues to be developments related to the Greek sovereign debt problem. One of the most difficult issues for markets to deal with in this regard is the great uncertainty related to assessing the success, or failure, of key political decisions. Investors generally have little experience in trying to assess the likelihood and outcome of political issues that are occurring in Europe at present and it is this political uncertainty that is playing a significant role in causing the volatility in markets.

In this very uncertain environment, economic prospects are showing signs of diverging slightly – in Europe the heightened political and policy uncertainty appears to be negatively impacting economic growth prospects, while in the US there are signs that, after an early 2011 growth slowdown, economic prospects are improving very slightly. While exhibiting only very modest growth, the US economy nonetheless seems to be moving ahead slightly more quickly than the near stand-still pace recorded a few months ago.

Reflecting the continued fragility in global growth prospects and risks in global financial markets, key central banks have taken steps in recent weeks to implement either new or have extended policies designed to ensure that financial markets remain as liquid as possible. Particularly important were renewed steps by the European Central Bank to help ensure that liquidity conditions in the banking sector are kept as accommodative as possible over the next few months. This action has become necessary because of rising investor concerns about the impact on European banks of potential falls in the value of European government bonds (particularly Greek) that the banks themselves own.

In Asia, the outlook for China remains critical. Chinese policy makers have moved numerous times to cool the pace of growth in the Chinese economy by tightening lending and credit conditions. Investors are now waiting to see if these cooling measures have been successful and whether Chinese authorities can then consider moves to ease policy settings. The key indicator will be inflation levels which have not shown any signs of falling.

Will this volatility in markets continue?

The current level of volatility in markets is likely to continue until the underlying issues related to debt and budget deficits are addressed, particularly those related to Europe. But there also remain uncertainties regarding the outcome of US fiscal (tax) negotiations which also need to be resolved in coming months. As we noted previously, it is the nature of the type of uncertainty – political uncertainty – that markets are having to deal with that is responsible, in large part, for the extent of the volatility that is currently occurring. It is difficult to see this uncertainty ending in the near future.

While this volatility continues, investors also need to assess the potential negative impact on the global economy that these extreme market moves can have. As well, a key decision is to assess whether market prices are sufficiently discounted at the moment to offset this uncertainty. It is possible for this nervousness to become self-fulfilling, with not just investors but also business managers becoming progressively reluctant to make key decisions. This would cause global growth to slow further.

With recent falls in equity markets, shares are generally cheaper than they have been since 2009. In contrast, the returns available from fixed interest and cash have fallen as markets have priced in more and more bad news. Looking forward, equities are well positioned to outperform over the medium to long term in all but the gloomiest scenarios, while bonds and cash are likely to provide a compelling return only if the world enters a renewed sharp downturn.

What about Australia?

Australia remains in a very strong position relative to most other countries, having low government debt, low unemployment and strong demand for some of our major exports such as iron ore, coal and agricultural commodities. In addition, our interest rates are much higher than those in the US or Europe which would allow the Reserve Bank to cut interest rates if required. But key to our future economic path will the outlook for China – it is the very strong and sustained increase of key commodity prices such as iron ore and coal due to robust Chinese demand that have been critical in enabling Australia to escape the worst of the Global Financial Crisis.

However, even with the continued solid demand for our key commodities, there have been increasing signs that the Australian economy is slowing. This slowing has most likely been caused by the lagged impact of the higher Australian dollar and tighter monetary policy. In recognition of this slowing, at their latest monthly meeting the Reserve Bank of Australia (RBA), although not cutting rates, seemed more open to the possibility that their next move could be to reduce official interest rates rather than to raise them.

The content above has been provided by Frontier Investment Consulting Pty Ltd. Read full disclaimer

What Should I do?

Watching others sell down their shares or other growth assets, as has appeared to be happening in recent months, creates the feeling of ‘should I be doing the same?'

Whilst everyone’s situation is different, the following points need to be considered:

For everyone who is selling, there is someone buying.
‘Following the herd’ has traditionally not been a very successful investment approach.
Share valuations, in the long term, are driven by Company fundamentals. This is generally what the fund managers of Superannuation funds are assessing.
Those members invested for the long term need to keep in mind that their objectives could be very different from those of short term traders that are currently affecting the market.
Short term performance figures are not a guide to how you should be investing your funds or whether or not your long term strategies are still appropriate.

Whilst the global economic outlook is fragile, with perhaps more bad news still to come, much if not all, of this negativity has already been factored into the current share valuations. We have all heard of the saying ‘buy low and sell high’, however, when in a period of high volatility many people do the opposite. This can lead to locking in your losses and missing the eventual rebound.

If you are concerned about current market conditions and your retirement plan, the following are practical steps you can consider to take back control of your financial situation:

Review your investment time frame and objectives
Review your appetite for risk, i.e. your risk profile. What type of investor are you – conservative, cautious, moderate and so on?
Review your current Superannuation Fund and your investment option(s).
Speak to an Industry Fund Financial Planner who can develop a personalised financial plan, taking all of the above considerations into account.

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15 August 2011

What’s going on?

Markets have been subject to heightened volatility over the last week or so, highlighting that there are global economic issues which have not yet been dealt with.

Recent economic data suggests that the United States economy is not just growing slowly but may even move into a decline later this year. Meanwhile, government debt levels in the US and in much of the rest of the developed world continue to climb and unemployment rates remain high.

The US was almost forced to stop borrowing in recent weeks which would have led it to immediately cut its spending. Whilst there is no question that the US is in a sufficiently strong enough financial state to meet its payments, political manoeuvring put doubts into the minds of markets about its intent to do so. As a result, one of the major credit rating agencies downgraded its rating of US government debt noting its concern that American institutions and policy making had become less predictable and effective.

Markets came to a view that measures put in place by the European Central Bank to support member nations with solvency issues were not sufficient. Markets remain concerned that the governments in Greece, Ireland and Portugal will be forced to reschedule their debt payments. These concerns broadened to include Italy and Spain, which are much bigger economies, but which have much more debt.

Governments and government agencies such as the US Federal Reserve and European Central Bank have been trying to deal with slow economic growth for the last three years but this has not lead to the return of a “normal” economic environment. As time goes by without success, markets lose confidence in the ability of these authorities to deal with these issues leading to the type of market behaviour we have seen in the last few weeks.

Will This Volatility in Markets Continue?

In the near term our view is that the volatility in markets is likely to continue until the underlying issues are addressed. This may mean very strong uplifts and declines in equity markets as market views are likely to continue to change.

The underlying causes of this volatility includes

The US economy remains uncompetitive in comparison to the Chinese economy, making it difficult for it to grow.
The level of debt in some European economies is too much of a burden and some may need to be written off or rescheduled for these countries to be able to solve their economic problems. In some of the emerging market economies such as China there is the opposite problem. These economies are too competitive leading to very strong growth and rising inflation pressures. This results in inappropriate investments with large losses on these investments a potential result in the future. Their currencies and/or interest rates need to rise to help bring inflation under control and prevent further inappropriate investment. Encouragingly, recent days have witnessed acceleration in the pace at which the Chinese currency is appreciating compared with the US dollar. This currency exchange adjustment is one of the key changes that needs to occur to put the global economy on a sounder footing for future sustainable growth.

These were also some of the factors underlying the global financial crisis in 2008.

What about Australia?

Australia is in a very strong position with low government debt, low unemployment and strong demand for some of our major exports such as iron ore, coal and agricultural commodities. In addition, our interest rates are much higher than those in the US or Europe allowing the Reserve Bank to cut interest rates if required.

Australian companies are also in good shape with relatively low levels of debt and healthy profit margins. The ability to outsource production to much lower cost countries such as China has also helped companies maintain very strong profit margins. With recent falls in markets, equity markets are generally cheaper than they have been at any time since 2009. In contrast, the prospective return available from fixed interest and cash has fallen as markets have priced in more and more bad news. Looking forward, equities seem well positioned to outperform over the medium to long term in all but the most gloomy scenarios.

The content above has been provided by Frontier Investment Consulting Pty Ltd. Read full disclaimer

What Should I do?

There is a natural tendency to want to act, or a feeling that you should be doing something when there is so much volatility and media focus on world markets. However, making decisions based on short term market movements can be detrimental to your long term superannuation balance and any other market linked investments that you may have, such as managed funds. This could be ‘locking in losses’ by moving your balance into cash or switching to an inappropriate investment option for short periods. For example, selling at a low point crystallises a valuation of your assets at that point and losing the ability to access higher valuations as the market improves.

Growth assets such as shares and property have always exhibited periods of volatility and negative returns. How long these periods last is always different and cannot be predicted. However, history indicates that over the longer term, growth assets almost always outperform defensive style assets such as cash and fixed interest. Most superannuation members' portfolios have a blend of different types of investments for diversification. It is important to remember that superannuation and other market linked investments are long term investments and periods of short term negativity need to be kept in perspective. It would still be appropriate for most superannuation fund members, even those close to retirement, to hold some growth assets to generate sufficient returns from their superannuation portfolio in retirement.

If you are wanting to actively manage your investments you should seek advice from your licensed and qualified Industry Fund Financial Planning Adviser who can review the appropriateness of your investment options to meet your personal circumstances and capacity to tolerate market volatility.