Stock market volatility – investment and strategy update Oct 2011
During these volatile times, it is important that you are kept you up to date with events and factors that are affecting investment markets. Please take the time to read this letter and let me know if you have any questions, as I would be happy to discuss them with you.
The situation as it stands is that even the shining light for the European recovery – Germany, is seeing a slow down in their economy. The PIGS are swimming in debt (Portugal, Ireland, Greece and Spain) and America has similar problems. Economists and the International Monetary Fund (IMF) are decreasing their forecasts for global growth.
China is also slowing and with the European problems knocking global confidence, investors are nervous and irrationally negative. During the global financial crisis in March 2009, equity markets reached their lows and subsequently recovered to their peaks in April 2010. Since that time, markets have moved sideways, lacking direction as investors wondered whether the world had recovered from the troubles of 2008.
If you cast your mind back pre-GFC, you will remember that the cause of the GFC was excessive debt accumulated by American consumers and businesses. Rising house prices perpetuated the problem as households felt ‘artificially richer’ and used their houses as ATM’s, redrawing equity for purchases such as cars and holidays. When the music stopped, finance was no longer available (you may remember the term ‘credit crisis’) and house prices in America plunged by 30%.
Fast forward to 2011 and the same problem exists – debt. America has shifted debt from the private sector to the public sector through their various stimulus packages and European Governments have emerged as having spent too much and collected too little taxes.
What we know is that using excessive debt to stimulate economic growth is unsustainable. This problem has been around before the GFC and still needs to be addressed. Debt needs to be repaid and consumption will slow.
Although we cannot predict the future with a crystal ball, what we may see over the next 12 months are ongoing challenges at a global level with Europe and America going into recession and Greece and other European countries defaulting on their sovereign debt obligations. Bailout packages and fiscal austerity/conservatism along with tax increases will occur to rectify the problems.
In terms of Australia, in absolute and comparative terms our Government debt is low, our banking sector is strong and our private sector has good fundamentals. However, our export partners such as America, China and India are likely to experience a contraction in economic activity that will have knock on effect for us in Australia. Our economy may slow, unemployment may rise, inflation may fall, house prices may fall, the reserve bank may reduce the cash rate and the Government may inject stimulus into our economy.
Looking a little further into the future, we are certain there will be an economic recovery, global growth will normalise and share markets will recover in value and move forward.
So what does this mean for your portfolio now? We will summarise our position with the following points:
1. We believe that no one should head for the exits. Share markets have fallen by 20% since July and selling now would simply realise losses that are only paper losses at the moment. We have provisioned strong cash reserves for all clients so any outgoings on accounts will be met without having to sell property and share based investments.
2. The economic problems discussed are likely to take some time to resolve so we are not in any great rush to buy shares. However in saying that, we believe that shares are approximately 15% undervalued and we should take advantage of irrational selling to buy good companies and attractive prices. We are cautiously optimistic and moderate in our approach. On one hand we do not want to buy into a falling market, however on the other hand we do not want to miss the opportunity to buy great companies at low prices.
3. If we do nothing, it may take 2-5 years to recover the losses of 2011. If we buy investments when they are undervalued, when the recover occurs, the portfolio may recoup the losses in less than 2 years because more investments were purchased near the bottom.
4. The principles of investing remain firm. Diversify across asset classes and within asset classes. Focus on companies that have low debt, strong market position, high sustainable dividends, good management and positive growth prospects.
5. We have a watch list of stocks that meet the above criteria that we would like to invest in. We are realistic but positive and are waiting for the right price and market conditions to increase our buying activity.
6. As Warren Buffet said “be greedy when others are scared”. Every time in history when share markets have fallen, they have always subsequently recovered and increased in value beyond the previous decline. In a few years time when we look back at 2011, I hope that we will appreciate the ‘bargains’ that were available. My role is to make you see them now in 2011 so that we buy opposed to watch them float by as other people panic and sell.
Please let me know if you have any questions by calling me on (02) 9324 8888 otherwise e-mail me at firstname.lastname@example.org. I will be in touch as opportunities present and when actions are necessary to your portfolio.