Quarterly Comment – September 2011

These were the three words that the US Federal Reserve used in their post meeting policy statement late last week. They were broadcast around the world, causing panic selling and dumping of stocks. The International Monetary Fund (IMF) then added their own warnings about the downside risk in Europe. The purpose of this warning however, was most likely to spur the political policymakers into coordinated action.

Unfortunately, this has just shattered already low confidence.

The actual problem is not just the fact that Greece has too much debt, is in recession and is effectively broke. It is, after all, only 3% of the Eurozone economy. But what has been missing so far is the cooperation between the other countries in support. There has been ad hoc assistance but all ‘too little, too late’ to have the required effect. The major countries involved – Germany and France - have had to deal with their own internal political reaction to the problem. It isn’t just an economic problem, it is a political one.

It wasn’t expected to get to this situation. Collective common sense should have prevailed over political self-interest, but it didn’t. The markets are now shouting a significant wake up call (a 20% fall) to them to fix it. Hopefully we will see large and coordinated packages required to stimulate the economy, write down debt and restore some confidence. We will have to wait and see what the response is in the coming weeks.

Our banks have no exposure to Greek debt and about 1.9% of their assets to the entire Eurozone of which only 0.3% is to governments, banks and other businesses in the group of countries including Portugal, Ireland, Italy, Greece and Spain (PIIGS). The RBA as recently as last Friday made statements saying that “the heightened turbulence in the global markets was not on the scale of 2008-2009, it was unclear whether it will be a temporary episode or a more serious market dislocation”. Reserve Bank officials in speeches this week said that there was not clear evidence that a slowdown in Europe or the US would affect emerging countries, and through them, Australia.

The RBA could respond swiftly to any downturn here by quickly cutting interest rates.

Australia has also just had its strong position reconfirmed by ratings agency S & P. Analysts said that we deserved our AAA rating due to “ample fiscal and monetary policy flexibility, economic resistance and a sound financial sector”.

Market volatility CAN be an opportunity. Fund managers may use this time to reweight portfolios replacing marginal quality shares with higher quality ones positioning for growth. Dollar cost averaging means that more units (or shares) are purchased for the same amount. Direct shares may be purchased at significant discounts. Our banks are now ‘on sale’ at a 40% discount to long term value. Remember that when you read the headlines “$3 Bil wiped off markets” this also means that other investors thought that it was a good time to BUY $3 Bil. For every seller there is a buyer.

Reacting to panic seldom results in a good outcome. It is better to make an informed and measured decision. We need to ask ourselves what has changed, what the likely outcome is and consider what the implications are of any decision made. This will be different for each person, as we need to consider: age, time frame, the level of cash/ fixed interest investments and drawings (if in pension phase) as well as the political, legislative and economic landscape.

While these will all be considered at your next scheduled review, please call to discuss if you are particularly concerned and an additional meeting can be scheduled.

Best regards,

Brett

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