News

Debt still looms as the big issue

In particular the debt problems in Europe are causing much uncertainty which is leading to very high levels of volatility in the sharemarkets.  The process has now moved to massive savings measures and budget cuts being implemented to reduce debt.  The downside of such measures is that reductions in spending can reduce economic growth and a healthy growing economy is usually a necessary element for companies and sharemarkets to grow.

The other big problem is that to firstly meet the interest bill and then hopefully to reduce the debt, a country needs a certain amount of economic growth.  As interest rates rise, the interest bill goes up and growth usually slows, it is the wrong combination to reduce debt.

This is one reason why interest rates are still so low in the US.

This means that for those countries burdened with debt, they are likely to have many years of slower economic growth as they grapple with the problems caused by excessive borrowing.

Property never goes down in value

This myth about residential property has just taken another hit. We know that property has fallen in countries such as Japan and more recently in the US and UK.  Now we are seeing European values fall.  In particular the case of Spain is quite dramatic.  A recent article in the Financial Times reported that a Spanish bank is selling 1,000 properties at a discount of up to 70%.

This occurred because at the peak of the housing bubble Spain, with a population of 45 million, was building more houses than Germany, France and Italy combined that have a total population of around 200 million.

Whilst this process created plenty of jobs, it also created too much debt on incomplete and unsold properties.

Official statistics show that property values are down by only 16% from peak to trough, but like some property statistics this is unreliable as many properties are held by the banks and may not have been revalued... yet.

What about Australia?

Our property market continues to be resilient.  We are still seeing prices rise, albeit at a slower rate, but prices and debt levels are very high by most measures.  No-one really knows how our market will fare in coming years.  To avoid a fall will be a remarkable outcome.  It is possible but it will be challenging.

Sharemarkets - what can we expect?

To understand the current situation we need to understand the prior bull market in global shares which occurred from the early 1980s. This was most clearly evident in the US share market, as seen in the chart. 

It is acknowledged that this section is based on material from Shane Oliver, Chief Economist, AMP

The bull market from the early 1980s was driven by a combination of falling inflation (which allowed shares to rise faster than earnings), de-regulation and smaller government (which helped boost productivity and profits), easy credit, globalisation (which helped keep inflation down and boosted trade), the Information Technology revolution and favourable demographics.

Since the turn of the century and increasingly through the last decade, many of these favourable themes have faded or gone into reverse. In particular:

• The benefit to shares from the shift to low inflation over the last 25 years has run its course;
• The global financial crisis will likely ensure a tighter credit environment for the next decade or so.
• High public debt levels are impacting as discussed above;
• Monetary policy in many countries has been forced into extreme swings;
• Government policy is moving back to re-regulation and greater government involvement in the economy. The proposed Resource Super Profits Tax is an example.
• Demographic trends are becoming less favourable as the proportion of the population at peak spending age starts to decline and baby boomers retire.; and
• To the extent the world is now becoming more dependent on growth in emerging countries, this will also add to economic volatility. This is because emerging countries are traditionally more volatile, reflecting their greater exposure to manufacturing which tends to be more cyclical than the services sector.

The outcome is likely to be lower average returns compared to the last bull market from traditional asset classes and a more volatile economic and investment cycle.

This will make investment management even more important.  Our use of carefully selected asset classes along with a variety of quality active managers will provide a sound approach for you.

Portfolio changes

We have again made improvements to our portfolios.  You will see these as we complete reviews or rebalancing.  We do hold the managers we use accountable to deliver value for the fees they charge.  As we are not aligned with any organisation we are able to remove and add managers as we believe doing so will benefit you.

We will continue to commit resources to this aspect of your financial planning.