If I remember back to the same time last year, the overall feeling with regards to the economy and markets was one of high expectation and positive sentiment, with most suggesting that 2011 was going to be a bumper year as the stock market rallied further from the low points seen in 2009. The sentiment lasted for only a brief period, as the toll left by natural disasters throughout the world in conjunction with political unrest in the US and a sweeping debt crisis in Europe began to take hold, culminating in one of the worst periods of volatility ever recorded through August, when swings of 5% were recorded in one day. As the market began to price in all of the unfolding developments, share prices fell and the mood once again returned to the gloomy days of 2008-2009 with word of an impending “GFC mark II”.
We are now into February of another new year, and thus far the sentiment is still rather negative as report after report seems to suggest that the onset of GFC mark II is imminent. At this point, it is worth remembering the feeling that was around at the same time – only one year ago, and how quickly things can change.
You see, although the press are reporting that the Greek debt crisis is on a knife edge, retail is in free fall and China is slowing – this is old news for global share markets, as these events have to some degree already been priced into current valuations.
It is for that very reason, despite all of the apparent bad news, that we have seen share markets the world over begin to rally throughout January and into early February. For all the bad events, the Australian, London and New York exchanges have seen gains of close to 5% whilst the German market has increased by over 10%.
What next?
The question now is are we through the worst? The short answer in terms of global events is probably not. The European debt crisis is not yet solved, but I suspect that throughout the course of this year the EU will continue to implement measures such as further austerity and perhaps seek some funding from the Central bank to improve credit, to improve the current position.
The US will continue its slow recovery from the deep recession that started in 2009, and global growth will continue although at a moderate level. This however, is par for the course when coming out of a global recession, and although the growth maybe moderate, we should be celebrating the fact that it is positive instead of dwelling on the negatives.
I would expect however, given that the markets have already priced in some of this bad news, that we will see a fairly strong to moderate year for market returns – with the potential to become an exceptional year.
Continue with a long term approach
Often when we meet our clients for the first time, particularly over the last few years, the initial discussion tends to revolve around continuing losses and the clients needing advice on whether or not now is a good time to move to cash.
Our approach to this issue is to look beyond the immediate short term and develop a strategy that is suited to our client’s necessary time frame. More often than not, when dealing with superannuation, we would consider a long term time frame of over 10 years for investment purposes.
It is our role as advisers to listen to our clients needs and provide them with an independent view with regards to their financial situation, a view that is free of prejudice and that takes into account all the facts and figures in developing a strategy.
Whilst we are sympathetic to all those who have lost money in the last few years, we are yet to condone any clients moving to cash unless it is absolutely necessary or suited to their risk profile. The reason being that with a long term focus in mind, growth is often a necessary component, and although shares are volatile in nature (at the moment extremely volatile) no one can doubt the track record of shares over the long term.
Let’s take the last little period as an example. Following on from the dot.com bubble and September 11 attack the Australian index hit a low of 2,700 points in March 2003. Just over 4 ½ years later, the market had reached extraordinary highs of 6,828, representing a gain of 153%! However, as we have discovered, the market should not be measured on short term periods.
As we move beyond 2007 and into 2012, the market bottomed in March 2009 at 3,111 (down over 50% from 2007) back to a recent high of 4,971 in April 2011 and now recently closing at 4,365. Clearly, this demonstrates that the share market is volatile in nature; however the proof is in the pudding.
If we take that period in isolation (March 2003 to February 2012); the market has gained over 61%,meaning an investment of $100,000 during that period would be worth $161,666 today, below average for long time share market returns, however, this is still a pretty good result.
Comparatively, if we take the same money and invest into cash with an average return of 5% over the same period, we would have finished with a return of 40% or $140,000. Peace of mind would have cost us over $20,000 during one of the worst periods in market history. In fact, if we look at the futures of both the cash and share market as they sit today they are heading in completely opposite directions. It appears on the surface, that after consecutive years of below average growth, global markets are poised for positive returns with optimistic views stating that there could be exceptional growth in the near future. Conversely, cash rates are falling – with the RBA implementing a rate cutting cycle that doesn’t look to end in the short term with each month potentially slicing more and more off of what was supposed to be a peace of mind investment.
Information contained in this blog is of general nature only. It does not constitute financial or taxation advice. The information does not take into account your objectives, needs and circumstances. We recommend that you always obtain professional insurance, investment and taxation advice specific to your objectives, needs and financial situation before making any investment decisions or acting on any information contained in this article or on this blog. HKS Financial Planning as an Authorised Representative of Guardianfp Ltd trading as Guardian Financial Planning. ABN 40 003 677 334 AFSL 237641. Guardian Financial Planning is a part of the Suncorp Group.
