|
Banks Amplify Interest Rate Hike
As expected, the Reserve Bank of Australia (RBA) increased rates by 0.25%, bringing interest rates to 3.75%. Shortly afterwards, one major bank announced an increase of 0.45% to their variable rate, effectively amplifying the decision in terms of its economic effect. While this type of behaviour will no doubt get some flak from mortgage holders and the Government, banks will argue that their funding costs have risen. If this type of behaviour continues, it suggests that the cash rate may not have to rise as much as markets thought. In effect, monetary policy could be more effective this cycle. Perennial looks for the cash rate to rise to around 4.75% to 5% by the end of 2010.
The Key Words of 2009!
As this is our last Perspective for 2009 it is a good time to reflect on 2009. Here are some key words that summarise what I believe were the big investment issues of 2009, as well as some of my thoughts on what may unfold in 2010.
Globalisation
November saw the 20 year anniversary of the fall of the Berlin Wall, reflective of a much more aligned world today than it was in the past. If 2008 showed us how quickly financial markets could spiral downwards in a globalised world, 2009 reminded us that the same can be the case on the way back up. In 2010, continuing currency fluctuations and the enduring issues of an artificially low Chinese Remimbi could see volatility and massive carry-trade flows.
The rise of China continues, with its economy on target to become the world's second biggest economy, overtaking Japan as early as 2011. On the other hand, the US economy and government finances could be described as "damaged goods" over the next few years (alongside Japan and the UK). The world looks to Obama to get serious about reducing government indebtedness to avoid the US in 2020 not looking like Argentina in the 1980s.
Stimulus
In a very good year, the world economy can grow at around 5%. According to estimates from the Bank of International Settlements, governments took 5% of the world's total economy (or one year's growth) and ploughed it back into the economy in the form of various stimulus programs. Stimulus packages appear to have worked as Keynes would have predicted; propping up a fragile (and in many parts of the world still fragile) economy. The stimulus will likely begin to be unwound in 2010, as economies hopefully normalise and private investment starts to increase. The world has never seen such massive stimulus, let alone such a withdrawal program. As government supported liquidity is taken away, a properly functioning financial system will need to take over for growth to continue. So far so good, but there is still a long way to go.
Bubble
The subprime bubble, caused by massive buying of US treasuries by the East and finally emerging in US Property (helped along by some creative investment bankers) is not a one off event. Other bubbles are likely to occur in the future, with the RBA particularly concerned about residential housing. There is a lot of talk (but not much action yet) around central banks targeting asset price bubbles, typically in real estate and stockmarkets, alongside their mandates, which typically revolve around inflation and full employment.
Bounce
High quality, sustainable equity and credit investments worked well in 2009. Investors who stayed the course were rewarded for their patience, with Australian equities bouncing nearly 50% from their March 2009 lows. I see the big question for 2010 centring around valuations. On the equity front, the solid forecast bounce in earnings per share in FY2011 appears to justify current valuations.
Leverage
Excessive leverage can kill your wealth. Individuals, corporates, governments and, lately, even quasi-government organisations like Dubai World can attest to this statement. Unfortunately, the greed part of human nature has a very short memory. Gearing a portfolio, say, five times increases/decreases returns by 500%. However, interest payments still have to be made and some investments can be frustratingly illiquid, just as you want to close out your position. There is arguably a place for sensible leverage at the right time in the cycle and it will be interesting to watch the margin lending books to see just how quickly the GFC becomes a distant memory to investors.
Liquidity
When markets are stressed, liquidity can be crucial both at a macro and micro level, with many investors still locked into illiquid funds or "capital guaranteed" structures, effectively cash, for several years. From a retail investor’s point of view, the key ongoing issue is ensuring their lifestyle cash-flow needs are invested in liquid structures.
Timing
It became patently clear in 2009 that most people did not see the GFC coming. Even Warren Buffett's Berkshire Hathaway did not escape. Whilst there are several famous stories of a tiny number of hedge funds that really profited from the GFC (such as one of John Paulson's funds that managed to return 600% in 2007), it became clear that sensible diversification became even more important. Good old fashioned long duration government debt played its defensive role well during the GFC.
Trust
We have all heard about fear and greed driving markets, but 2009 reminded us that "trust" can be a big factor. The failure of Lehman Brothers was, in many ways, a breakdown in trust, as distinct from fear. It was only when governments started printing money in an effort to rebuild trust in the financial system that there were some early signs of recovery.
|
|
Australian Financial Services Licence No: 238141
Download John McAuliffe RIAA FSG
WeCoachWealth Pty Ltd
Corporate Authorised Representative No. 310793
Download John McAuliffe Advisor Profile
|
Managing Your Tax 
