Fureyous

The RP Data/Rismark house price index has shown the first monthly decline in house prices in 17 months and largest since April 2008!!! …well…its down seasonally adjusted…house prices actually still went up. With global asset allocation gurus like Jeremy Grantham (one of the fundies I do listen to) and vocal locals like Steve Kean suggesting the Australian residential housing market is in a bubble, I guess it was just a matter of time.

Jeremy Grantham, of GMO, believes both Australian and UK house prices are completely out of kilter with household income, and as a recently divorced current renter who is looking at houses with the view of ideally owning a (small) mortgage, I have to agree that the prospect of buying a house in Australia (ok, in Brisbane…well…say…not too far out of Brisbane CBD) is downright scary. Now I get the undersupply issue in Australia, but with households stretched so much to buy, with credit being tougher to get, and with rents so low (I pay a rental yield of around 2% to 2.5%) that investors must be edgy, at some stage growth must slow or go backwards…lets face it, everything is cyclical. Grantham says that if the Austrailan and UK house bubbles don’t correct it would be the first time in history that a bubble has not burst…so….is the latest monthly downturn the beginning of the end? Maybe if there’s an external shock to the local (or maybe global) economy.

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I haven’t looked at the government bond yield curve for a while so here it is. I’m sure you don’t need the chart to know that the economic outlook was looking much better back in March and April, then it has since (i.e. the curve was sloping upwards much steeper back then). With bond yields below 5% for maturities out to, say, 6 years, the market does not appear to hold any strong views of strong inflation and therefore any strong likelihood of interest rate rises. With double dip recession and deflation talk in the US, China’s rate of economic growth slowing down, and Europe continuing its talk of being fiscally austere, its no wonder the local economic outlook isn’t as bullish as the newspapers suggest.

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I returned home this afternoon from a conference and turned on the new 24hour news channel, ABC24, and was listening to a couple of Australian finance experts say how positive they are about the US Economy. The ABC interviewer said Robert Shiller (Yale Professor of Economics and early predictor of both the tech crash and US home price crash) said there was a 50-50 chance of a double dip recession after which they both strogly disagreed. Anyway, I digress, I actually just read the Robert Shiller comments and he actually said,

For me a double-dip is another recession before we’ve healed from this recession … The probability of that kind of double-dip is more than 50 percent.  I actually expect it.

There are in fact many many US academics who are expecting a double dip recession and they are largely putting it down some or all of the folloiwng reasons (courtesy www.caclulatedriskblog.com) …

• Less federal spending this half
• End of the inventory rebuild
• Continued household deleveraging
• Another downturn in housing
• Slowdown in China and Europe
• Cutbacks at both State and Local level

Now the Australian fund managers may be right and the US may not enter recession again and perhaps I’m reading the wrong material, but I have to admit that it is very rare that I hear Australian fund managers talk of anything but bullish markets and economies…I’m afraid their conflicts of interest on these macro issues have lead me to no longer listen to a word they say.

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This chart comes from the McKinsey Quarterly from back in April 2010 and shows how inaccurate equity analysts have been when predicting Earnings for S&P500 companies over the last 25 years….basically far too bullish and no where near accurate. So just like the last post, the key learning is to not take too much notice as to what  analysts predict when it comes to the stockmarket as they are pretty much guaranteed to be wrong.

The biggest concern to come out of this chart is that they may be more prone to overestimation….might relate to their remuneration incentives…I don’t really know…just saying

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Source: AFR 1 July 2010.

*December 2010 forecasts – no June 11 forecasts provided

With such variance amongst the so-called leading strategists in this country, I’m sure you can throw the proverbial dart at the dartboard and have just as good a chance as picking where the ASX200 will be in the next 12 months. Oh well, I’m sure they all sound impressive when they explain how they come to their guaranteed incorrect estimate!

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I have just submitted an article, on behalf of my employer, to the Australian version of the Journal of Financial Advice. Its a fairly simple message….advisers could better look after their client’s financial needs and goals by increasing their focus on their client’s cash flow needs as opposed to the focus on investment strategy. I know investment strategy is the sexy part….both for adviser and client…but increasing a client’s ability to save will quite often result in a much higher balance and retirement lifestyle then chasing investment returns risk.

Anyway, for anyone interested my draft version can be found by clicking Guaranteeing Investment Success – July 2010.

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Sharemarkets both here and around the world showed solid performance over the last 12 months despite the lingering effects of the Global Financial Crisis in the form of sovereign debt concerns in Southern Europe.

The performance of Global Shares was 5.3%[1] in the year to 30 June 2010 although the last 3 months declined by 4.8% as concerns about the ability of the Greek government to pay its debts triggered a contagion effect on global sharemarkets. Given an insolvent government has never had a solvent banking system, and strong banks are required for economic growth, concerns around a “double dip recession” have surfaced around the world and held markets back in recent times.

For the unhedged Australian investor, the global sharemarket performance may have been better but the Australian dollar strengthened against most major currencies over 2009/10 thereby providing a slight drag on performance for unhedged global investors. The performance of Hedged Global Shares to the year ending June 2010 was therefore a much better 11.7%[2].

The Australian sharemarket had one of the better sharemarket performances around the world with a one year return to the end of June 2010 of 13.8%[3]. Most of this performance was achieved during the first quarter after which the market has largely moved sideways as local interest rates increased and the above-mentioned Euro-Sovereign debt concerns appeared.

The rising local interest rates put a mild dampener on local bond returns but they were still a reasonable 7.9%[4] for the year ending June 2010. The Reserve Bank increased interest rates from 3% at the start of the financial year to its current level of 4.5% and this resulted in a 3.9%[5] average cash return for the year ending June 2010. Whilst the Reserve Bank announced that they are more likely to increase than decrease the cash rate in the future, it is likely that the Euro-Sovereign Crisis will be the main determinant and therefore may stay on hold unless global economic data produces some extremely positive results.

The next 12 months will continue to present some challenging times for global financial markets as the above-mentioned debt issues are resolved. Australia continues to be the lucky country with a strong resource market continuing to sell its commodities to a fast growing China. Our residential property market continues to be buoyant and this is also a strong positive for our economic strength given its contribution to household wealth. Whilst these issues are positives, they also define the main risks to the Australian economy and our sharemarket strength. Whilst we anticipate further gains in sharemarket performance over the coming year, we also anticipate it will be a bumpy ride.

[2] MSCI World Index (AUD) Hedged

[3] ASX All Ordinaries Accumulation Index

[4] UBS Warburg Composite All Maturities Index

[5] UBS Warburg Bank Bill Index

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Overall it was a pretty good 12 months for all asset classes as they pretty much all achieved positive returns. Gold (USD) was the best with an annual return to the end of June 2010 of 34% whilst the only negative performer was the Australian Mercer Unlisted Property (pre-tax) index (looks like valuations finally caught up with them).

Despite the first six months of this calendar year producing around -10%, the Australian sharemarket finshed the financial year with 12 month performance of 13.8% (All Ords Acc Index). This was marginally better than the MSCI World Index (hedged) whcih returned 11.7% but not quite as good as the emerging markets, where the MSCI Emerging Markets Index returned 19.8% (despite China returning -1.8%).

For bond investors the year was a solid 7.9% for the Australian market (UBS Composite) and 10.0% for the global market (JP Morgan Broad WGBI ex-Aust index) and good old cash produced 3.89%.

With our solid economy and solid banking system our listed property market produced good returns and the ASX200 Property Trusts Accumulation Index had a 20.4% return…still a long way frion its 2007 high but I’m sure any long term listed property investor would be over the moon with that result.

Moving forward its a good bet that volatility will dominate the equity markets as deflation becomes a risk again in the developed markets keen on fiscal austerity. Removing stimulus before the end of an economic recovery is more likely to weaken the economy than provide growth. Either way, China’s growth will more important than ever to Australia and the rest of the world and if its GDP growth levels don’t look like hitting at least 8-9% then some more economic pain may be on the way for all.

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 The latest yield curve of Australian Government Bonds shows interest rates staying around 4.5% for the next 3 years. This is a fairly obvious statement about our economy suggesting that growth is likely to be flat for a few years and inflation too is likely to be relatively unchanged. Of course, this view may will change but its the current market view of Australia.

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