After a very positive run of around ten months, financial markets posted negative results in January. This was amid problems in Greece, concerns about China and doubts about the strength of the Global Economic recovery.

Despite the returns on portfolios for the year ended 31^st January have been excellent with investors with a growth asset allocation enjoying returns of around 20% for that year. Of course this was much needed after the previous losses.

The question is- was January a reversal of the recent recovery or a merely a break in the trend which will resume? Our view is that it is the latter and the recovery still has plenty of life, despite there being challenges ahead.

Greece & Government debt

The main news headline has been the problems facing Greece which has extended to a much lesser degree to concerns about other European economies.

During the crisis, it was the Private sector that met difficulties and in many cases, private entities failed, or were only saved with Government support.  As part of this process much of the problems and debts that were weighing on the private sector were transferred to the Governments or public sector.  We now have many countries with much higher debt levels and questions are being asked about the ability of those countries to repay the debts.  We even had Barnaby Joyce questioning the ability of Australia to repay its debts in the future.  This was a little hysterical to say the least and probably reminded some of us about the banana republic comments by Paul Keating many years ago.

The reality is that debt must be repaid at some point and we have many developed countries labouring under the load of heavy debt.  The problem is compounded by aging populations making it more challenging for Governments to generate revenue.

These developed countries include Greece, Iceland, Ireland, Spain, Portugal and Poland, none of which are significant economies individually. It is unlikely they will default on their loan repayments as they will gain support of other European countries (mainly France & Germany) but whilst there is talk of concerns they will still create doubts and impact investor confidence. 

The next group is the US & UK who have very large debts and are facing a long period of slow economic growth. 

All these countries need their consumers to spend to generate economic growth.  The problem is that many consumers are focussed on repaying loans and they are reducing spending and the populations are aging which also leads to less spending and less tax revenue collected.

Our approach

The traditional approach of many Financial Planners is to invest in overseas funds that have exposure to countries based on their size.  Place the most money in the biggest (US), then next biggest, etc.  We have never subscribed to this view and our choice of managers continues to reflect this.  Whilst we have not given up on the major economies as there are still companies in those countries that are worthwhile, we have included exposure to the Emerging Economies.  Those that have excellent growth prospect and will dominate the world economy in the future. 

China - what's the problem?

The problem is that the Chinese Government was worried that their economy was growing too strongly, something most countries wish they had to contend with at the moment.  They have taken measures to slow their growth to a more manageable rate. This will occur periodically in Emerging economies as they endeavour to find the right level of economic growth.

It is still expected that China will grow at around 9-10% this calendar year which is no cause for alarm.  

Australia - A developed economy benefiting from the Emerging markets

Australia is one of better functioning developed economies.  Our level of Government debt is really quite low by world standards.

We should see strong economic growth this year, unemployment continuing to fall and the ongoing advantage of our relationship with the Asian economies.

This means that the assets within your portfolio that have exposure to Australian assets should perform well.

Working for you behind the scenes

As part of our regular review of the investments that we have approved for use in client portfolios, we have recently made a number of changes to the funds and amount allocated to the various asset classes.

We are not trying to pick sectors or funds; we know that stock picking is not the way to add value on a consistent basis over the long term.  Our approach is to make adjustments to the portfolio to ensure it is well positioned for the future.  You will see these changes as we conduct your next review.

The US Federal Reserve raises its discount rate.

What is the discount rate? It is the interest rate charged to commercial banks on loans they receive from their regional Federal Reserve Bank's. 

This made a good headline as it is a clear step in the unwinding of the massive economic stimulus measures in the US.  There will be those who see it as a negative move as it will slow the economy and risk the US falling back into a recession. However we should think about why it is happening.  Do we really think the Federal Reserve wants to return to a recession?  A more realistic view is that the US economy is strengthening and is it an opportunity to begin to return rates to normal level.

It is true that if rates do rise by large amounts over a short period that it will have a negative impact on sharemarkets.  However what we have seen is a 0.25% movement aimed at helping to prevent the economy growing too strongly and returning to the boom-bust cycle.

Summary

We are seeing considerable change and much of it is occurring for positive a reason, that is the outlook is improving.  We also should keep in mind that the diabolical predictions of a depression did not eventuate. 

It is now about the Governments and Reserve banks around the world managing the recovery.

• November was again a positive month and the figures for the twelve months from 1^st December 2008 to 30^th November 2009 were very good.
• Clearly this recovery was necessary and will continue to be so after the previous falls, but we can take considerable comfort from the recovery.
• March was seen as the low point in this part of the economic cycle and remaining invested has been worthwhile.
• Those who gave up at that point and decided to sell out have paid a high price.

How strong have the last nine months been? 

The returns for the period 1 March to 30 November 2009 (9 months) are summarised below.

1.	Australian Small Companies	69.71%
2.	International Property	68.40%
3.	Australia's Top 300 Companies	46.11%
4.	International Large Companies	44.19%
5.	Australian Property	40.16%

This reinforces the argument that returns can be above average after a severe downturn.  It also confirms how hard it is to try and pick winners and guess the right time to buy into markets.

The 2010 Outlook

• Trying to comment on the future in this business is risky. Opinions are at both extremes at the moment. The range of possible outcomes is as wide as we have seen in recent times. Many are predicting further significant problems and others feel we are looking at far better times. Of course the most common expectation, as is the usual safe route, is for a more settled, lower return year. Those in this corner are the experts that are most often wrong.
• There is still much nervousness in the financial markets. The reaction to the recent Dubai problem shows this. As I have said before, there will be tough periods where falls in value will have to be endured.
• What we do know is that Cash & Term Deposits are very likely to provide low returns although they will increase. Importantly Emerging economies have much better growth prospects and their Sharemarkets should outperform.
• Australia is looking in relatively good shape and should provide good value for those with exposure to our sharemarket.
• However as always trying to pick stocks and time the markets is impossible to do successfully on a consistent basis at the best of times. There is still plenty of uncertainty that means we are far from the best of times, making this unrewarding task of stock picking even tougher.
• The key challenge is - do Central Banks leave interests rates as they are and risk over stimulating the economy and causing inflation to jump. Or do they risk raising rates to early whilst there are still millions unemployed around the world. It is a very difficult task. Australia has increased rates and the US have chosen to keep them near zero. Contrasting approaches for economies performing at different levels.
• We are confident that our approach of diversifying part of your portfolio into sub classes such as small companies, emerging markets, infrastructure will continue be a sound approach. Given the uncertainty we believe that diversification, a well constructed portfolio and managing risk against your tolerance level is as important as ever.

Fund changes

• The events of the last 2 years have seen many changes in the industry. One significant change is that BlackRock have taken over Barclays. This means that you will no longer see the name of the Barclays on your Funds and it will be replaced with BlackRock.
• The former Barclays Funds involved were Index Funds which are simple low cost funds that do not require decisions by money managers on how to invest.
• This means that there is no need to reassess the Funds because of the change, but we will continue to monitor these and all other funds as part of our normal process.

Accident insurance - is it worth it?

• These policies pay a benefit for a claim that results from an accident.
• Whilst this sounds good, the reality is that the majority of claims are due to illness not accident. This simply means that you are paying for a policy that you are highly unlikely to ever claim on - even in the event of your death.
• If you have a policy like this you should talk to us as there will most likely be a better use for your money.
• This is not a recommendation to cancel the policy. You should not, as some cover is always better than none, but if you have one of these policies or someone is trying to sell you one, then you should talk to us.

A New Year - A great time to revisit your plan

• For many this is the season to reflect on the recent past and look ahead to how you would like things to be.
• Our approach is to do more than merely look at your investments, we want to help you organise your financial affairs so that you can achieve your personal and lifestyle goals.
• We would like the opportunity to discuss this further with you and ensure that you are doing all you can and that your plan is still consistent with your current circumstances and goals.
• If you would like to do this, feel free to arrange a time, otherwise we will address this when we contact you about your next review.
• We thank you for your support over the last year and wish you all the best for Christmas and the New Year.

• Remove unnecessary fees
• Reduce other fees
• Get value for fees
• Your fund passes on a lower tax rate to your super account
• Take advantage of strategies that are available to you
• Focus on your goals - what is important to you?
• Ensure your portfolio is well constructed & well diversified across & within asset classes
• Have a plan for managing your cash flow, now and in retirement

A Comparison

Below is a comparison between our service and fees with that of a Melbourne based planner trying to service the area. 

	Other	MG Financial Planning
Entry Fee on Contributions This is of no value to you and we believe it is inappropriate to charge this fee.	3.0%	Nil
Fee deducted from your salary packaging for each contribution This is of no value to you and we believe it is inappropriate to charge this fee.	$9 per month	Nil
Ongoing Fees The level of fees is important as is the service that comes with the fee.	3.07%	1.5-2.5% and reducing as the balance grows
Service In one example we found that some very obvious advice and strategies should have been recommended by the other planner.  We initiate contact and provide recommendations as part of our ongoing service.	Reactive	Proactive

We are a local firm with the experience and the quality and quantity of staff to help you.

Please call Ben Lancaster or Gary Lucas for a second opinion.

Geoffrey has joined the Movember campaign, sporting a very impressive and suave moustache.  He has already raised $300 and is hoping to increase that amount before the fundraiser closes.  Geoffrey commented "I would like to make people aware of depression & cancer and to raise heaps of money to help stamp them out."

If you are able to contribute please follow this link http://au.movember.com/mospace/367306/ and make a donation before 10 December 2009.

Other beneficiaries of the charitable giving by MG and its staff are;

• Gippsland Fire Relief from proceeds of a Trivia Night
• Five Star Project from proceeds of the second Trivia night
• The Warry family of Maffra
• Rotary Club $2,500 for specific items for fire victims in Churchill area
• Breast Cancer Foundation

Gary Lucas, Director of the firm said that it was great to see the firm and individual team members giving back to community and clients.  Some of the events such as Trivia nights have involved a significant time commitment.  We have a fantastic group of people and they really do care about those in need and take a lot of pride in helping others

• October saw most asset classes lose value. Continuing the trend, our sharemarket continued to fall in early November.
• A fall was expected and to a degree, necessary, as the pace of the recovery in investment markets was, as we have said recently, a little too strong.
• A period of consolidation which will have minor falls of say 5-10% or flat returns can be useful to avoid creating an environment of over confidence and inflated values.
• There has been talk of a double dip recession in the US which will have an impact around the world. It is common for this fear to exist after recessions however it rarely occurs and seems unlikely again this time. Please do not interpret this to mean that the risks have completely passed. They have not. Indeed very careful management of the world economies are needed now.
• We have the US with very high and possibly still rising unemployment. They are talking about keeping rates low as this incredible level of economic stimulation continues.
• China is looking at possibly raising interest rates as they try to protect against the creation of asset bubbles.
• In Australia we are raising rates and our situation is better than expected. The reason for the different approaches is that each country initially looks at the global situation and then its domestic position before deciding on what to do. Each region has its own challenges.

Returns for the last 9 months

The returns for the period 1^st February to 30th October 2009 (9 months) are summarised below

1.	Australian Small Companies	55.57%
2.	International Property	37.66%
3.	Australian's Top 300 Companies	36.98%
4.	International Large Companies	27.34%
5.	Australan Property	16.11%

This reinforces the argument that returns can be above average after a severe downturn.  It also confirms how hard it is to try and pick winners and the right time to buy into markets.

No time for complacency

• For some it is easy to forget the events of just over a year ago. It was a frightening period and the consequences are still having an impact. Now is not the time to be thinking that the good times are back and anyone can pick a stock on the market and make money. It is not the time to aggressively borrow personally or for investment.
• We are in different times and caution must be exercised. Look at your loans and have a plan to reduce them or at least to be able to fund higher interest rates. Around 80% of the mortgage loans in Australia are variable. As rates rise this will have an impact on our spending and possibly economic growth.   

Your Portfolio

• Your portfolio must be well constructed and well diversified. Our approach of reducing reliance on the US in favour of emerging markets and non traditional managers is very sound both now and in the long term. Also allocating funds to small companies, if done well can add value.
• We are continuing to work for you behind the scenes and regularly monitor the investments we recommend. We are about to add another fund to our portfolios and have others on close watch. Our criteria include ensuring that the funds we use are either low cost and tied to an index or if they charge higher fees, they must deliver value for that fee.
• Importantly we will continue to manage more than just the portfolios. Monitoring the progress you are making toward achieving your goals, whether it is a retirement target age, an income level or saving tax, is something that we know is important.

Australia not just a great place to live but also a great place in which to invest.

• Asia is fast becoming the engine of the world economy. The growth in that region will continue for a very long time and at an exciting rate. Some points;
  • The Financial Times recently reported that China only has 38 million passenger cars whereas the US has 230 million. The Chinese are buying about a million cars a month, yet only 5% of the Chinese population owns a car.
  • o By the way the majority of the new cars in China are bought with cash. Interesting concept!
  • o China are building roads and railroads at a staggering rate. There is a massive amount of infrastructure being developed.
• Other Asian economies are also experiencing demographic change that is contributing to growth.
• In Australia we benefit from this. China is our number one export partner and we now export more to India than we do to the US. This helps explain why there was much recent media attention around our Political relationship with the Chinese.
• Our relationship with Asian countries clearly protected and limited the damage throughout the recent GFC.
• It also underpins our economic growth to a degree. This in turns helps our companies prosper.
• Growth plus dividends, plus some tax credits make for a good investment and Australia is very well placed to deliver on all fronts.
• There are always risks and high housing prices are a concern, however a growing population is helping in that area. Also, if the RBA overdoes the interest rate increases it could easily create problems and of course the Government has to nurture our relationship with our trading partners.
• It is all a balancing act, but I would much rather face these challenges than those of the US and much of Europe.

Self Managed Super funds are becoming more popular

• According to the Australian Taxation Office Self Managed Super Funds (SMSFs) are now the largest and fastest growing segment of the super industry.
• Our firm combined with our Accounting Practice has all the skills and experience you need in this complex area. We can advise on whether a SMSF is right for you, , set it up, provide investment advice, recommend a stockbroker, provide insurance advice, prepare the Financial statements, Tax Return and the Audit.
• We manage around 200 SMSFs
• We are currently running free seminars on SMSFs. They will be presented in our Boardroom by the Accountants at MG. For more information please contact shonaanderson@mcmgroup.com.au