Alchemy Wealth Planning - Market Update

Despite a very rocky start to the year there are sound arguments to say that we have seen signs of a market turning point.  History has shown, that when a sharemarket bounces back it can do so very sharply. At the time of writing, since the low in March we have seen the Australian index increase by as much as 17%.

We may continue to experience short term volatility and overreaction to both good and bad news but in the midst of the media frenzy about market turbulence it’s an important time to look forward and review your investment strategy to make the most of new opportunities on the horizon.

While it is important to recognise that Global and Australian economies are slowing dramatically, it is equally important to examine the large number of positive initiatives being undertaken to ensure the economy comes through this cycle and to repair any damage. They include:

• The reduction of the official interest rates by the Reserve Bank of Australia (RBA)  from 7.25% to 3% since September.
• The Federal Government’s $42 billion spending package.
• Standard & Poors (the Ratings Agency) affirmed Australia’s credit rating at AAA – the highest rating possible.
• An increase in demand for housing and construction
• The rural sector, after several drought years, is contributing to economic growth with a larger wheat crop.
• The 30% fall in the Australian dollar will help our exporters compete in overseas markets as well as supporting local producers to compete against imports.

History shows markets tend to rise for six to nine months before an improvement is seen in the underlying fundamentals of the economy. “The key to market performance from here is the depth and length of recession in Australia versus market expectations. If Australia experiences a relatively mild recession compared to the 1990-92 experience, it is entirely possible that the local market continues its March-April recovery.”

Based on the latest Russell investment survey of 40 leading Australian fund managers:

• The majority of managers continue to perceive value in the Australian market. They predict the S&P/ASX 200 Index to finish above 3500 at the end of 2009, of which 15 per cent are even more upbeat and predict the Index to finish the year at 4000-4500.
• Optimism was strongest for the healthcare sector, with 56 per cent of fund manager expressing confidence towards the sector versus 28 per cent who are bearish.

According to Ian Huntley’s Morningstar report, he thinks the recent March lows showed signs of reaching the turning point however he remains cautious as the missing link is confidence and therefore we may continue to see some volatility over the short term. However, “additional buying makes a lot of sense” particularly in quality blue chip companies with strong balance sheets and as long as it is for the medium to long term.

As Colonial First State research point out; “while some companies have reported a fall in profits, they are  still making money. There are also those that have managed to increase profits such as JB Hi-Fi, Cochlear, CSL, Coca Cola Amatil and Wesfarmers.”

(Ref: Colonial, Lonsec, Asgard, BT, Russell Investments and Aviva).

It’s important to keep to your strategy

• Select good quality managers who invest in companies with secure cash flows, with limited expectations in their valuations and have sound management teams. 
• Focus on the right levels of diversification and risk within the portfolio.

The value of portfolio diversification was clearly demonstrated - across stocks and asset classes during 2008 and early 2009. While shares are well positioned for growth in April/May, it could be a bumpy ride, especially over the next few months. 

• Don’t panic – invest for the long-term. Investing involves a trade off between risk and return - the most effective way to reduce risk is to invest over the long-term. 

As Warren Buffet once famously said, ’The stock market is a wonderfully efficient mechanism for transferring wealth from the impatient to the patient’.

• Investors need to remember that markets have been here before, crises do happen, they have occurred at regular intervals.

If you would like to know more about current market conditions, discuss how to take advantage of the opportunities to invest, or have any further queries regarding your investments, please do not hesitate to contact me or Rene on 07 5504 1100 or click here to make an appointment.

Regards,

Ashley Quinton

Wealth planning and investment strategies manager

Important note

The information contained in this email is general advice and only contains general information. It does not take into account your individual needs, objectives or personal circumstances.