News

The headlines - what is the purpose?

The recent stress testing of the European Banks captured headlines due to the 7 failures.  What about the 84 that passed?  Many of us would be happy with a score of 84 out of 91.  What was expected?  Surely not 100%, otherwise why were the tests necessary?

As always you need to look deeper.  5 of the failures were Spanish savings Banks.  If you recall last month's article this will not surprise you and I am sure it didn't really surprise the Bankers in Europe and around the world.

The stress test was considered a little lenient and unlikely to ever produce a result that would cause panic.  However it is something constructive and has set targets that have helped to soothe the market a little.  It has also added a level of transparency which is crucial.

The risk of a double dip recession

There is still a risk but you should keep in mind that double dips are very rare.  Over the last 85 years the only double dip was at the start of the 1980's.  Those currently with their hands on the levers for the economy will have learnt from that and will be doing their best to avoid a repeat.

Also whilst much of the economic news is moderating it is still positive.  China is a very good example with growth slowing to 10.3% for the year ended June 30^th down from 11.9% for the year ended 31^st March 2010.

Interest rates are very accommodating at the moment (Australia is an exception) with most the world enjoying low interest rates which provide a good opportunity for investment and growth.  It is higher rates that put the brakes on the economy.

The Emerging economies will continue to be a major contributor to world economic growth.  Ideally this will be sufficient to offset weaknesses in developed markets and create an overall benefit.

Inflation & interest rates

The inflation rate for the June quarter was 0.6%, giving an annual rate of 3.1%.  The RBA preferred range over the medium term is 2-3%.  Whilst the recent figure is slightly outside the range, it appears that an increase in interest rates in August is unlikely.

Expectations

Many commentators expect to see the Australian sharemarket higher by the end of the financial year and improving more by mid 2011.  This will not be a smooth ride as there is likely to be some volatility.

Some see the recent falls as a buying opportunity that could be well rewarded.

The chart below shows the opinion of stockbrokers RBS Morgans.

This doesn't mean that we should invest heavily in our sharemarket now.  It means that those salary sacrificing should continue and those currently invested should remain in the markets.  If you have funds to invest, it is an opportune time to talk with us and determine how best to use your assets to help you achieve your goals.

Don't follow the herd - stick to your plan

Information moves fast these days and is so prominent in our lives via papers, TV, radio and the internet.  If you miss all that I am sure someone will send you an email or a text.

Competition is strong for your attention so the information needs to encourage you to use a particular service.

Additionally there is plenty to report on the financial markets; the GFC, Greece, Spain and the rest of the European economies, European Banks, the so called ‘fat finger' trade, China slowing its growth, our Resources tax, our election, inflation numbers, interest rates, economic growth and recessions.

The big players move large amounts of money over very short periods based firstly on their fundamental economic views and also based on their sentiment at the time.  This can cause large fluctuations in the markets.  The average investor cannot keep up.  Importantly, nor should you try.  Excessive trading will not enable you to beat the market on a consistent basis.

Often the events of the markets are an overreaction to the real world events.  Many investors tend to view uncertainty as a negative and react accordingly.

The worst thing you can do is to sell at a bad time and then nervously wait on the sideline for the right time to buy.  The reality is that the best time to buy is when things look their absolute worst.

You need to tune out from much of the hype that currently surrounds the financial markets.  Taking the long term view is not exciting but it is the key thing you can do to give yourself the best opportunity to achieve your goals.

As always we are happy to meet with you to discuss this and any other issue.