feature image

Update on Global Share Markets - Big Sky Financial Solutions

Update on Global Share Markets



Global share markets fell sharply over the last few days. This has flowed through to the Australian share market, with the S&P/ASX200 currently down to 4,019 points.

The sovereign debt issues in Europe and recent poor economic data out of the United States have led to considerable market volatility in recent days and months. The sovereign debt issues in Europe cross two complex and associated issues.

The first issue is a solvency issue. Greece is effectively insolvent and Portugal and Ireland have potential solvency issues. The good news is that the European Union and the European Central Bank have finally recognised the insolvency issue in Greece. The new Greek bailout package is a fundamental step in the right direction. The package materially reduces Greece’s financial burden via the extension of loan terms and the reduction in interest rates; these measures were also extended to Ireland and Portugal. This reduction in Greece’s debt burden is a fundamental step in putting Greece on a path to sustainability.

The second issue engulfing Europe is a potential sovereign debt liquidity crisis affecting larger European countries, particularly Italy and Spain. It does not appear that either Spain or Italy are insolvent, however a collapse in bond market confidence could push yields on sovereign debt to levels that create a true liquidity crisis. In our view monetary union presents particular challenges to addressing this situation. For a country that has its own currency and an independent central bank able to readily print money, this situation would be addressable. In such circumstances the central bank could print money and buy bonds on the open market to drive down yields and monetise government funding requirements.

We feel it is unlikely that these liquidity issues will result in a financial Armageddon scenario and that correct policies will eventually be pursued. However there are differing views on the correct path of action and therefore we could see a sustained period of considerable volatility until this is resolved.

The recent decision to raise the US debt ceiling has removed considerable risk in the short term and we are confident that the US will take action over the next few years to ensure it is on a sustainable long term fiscal path. Economists are now focusing on the strength of the US economy. All eyes will be watching the release of US unemployment data tonight, with a weak number or a decline meaning the US economy has potentially entered a second recession.
Despite the economic turmoil in global markets, the Australian economy remains in relatively good financial health thanks to a strong resource sector. It should be noted that Australia has the strongest GDP growth, lowest unemployment, and strongest AAA rated balance sheet in the OECD.

The Australian Bureau of Statistics yesterday released data that showed Australia produced a $2 billion-plus trade surplus for June, resulting in a $22.4 billion surplus for the 2011 financial year. This is the biggest surplus in raw terms over the 40 year period that records have been kept.

Economists have commented that the unusually buoyant trade conditions for Australia are a result of near-record commodity prices for much of the country's resources and help explain why the central bank can't rule out further interest rate rises.

The official interest rate in Australia currently stands at 4.75 percent, which is significantly higher than most other developed countries. This provides the Reserve Bank of Australia (RBA) with scope to cut official interest rates to stimulate the domestic economy. Most major western countries cannot cut interest rates dramatically as they are already near zero and governments cannot provide great wads of fiscal stimulus the way they did in the Global Financial Crisis (GFC) as they are deeply in debt.

Recent volatility in global markets is expected to result in the RBA putting off interest rate hikes indefinitely, with the possibility the next move in interest rates may be down. Some economists are even suggesting that the RBA may hold a special meeting next week to cut interest rates.

This would be similar to what happened in 2008 during the GFC, when the RBA made a series of “emergency” rate cuts.

Any reduction in interest rates would provide a major boost to the struggling retail sector, which is suffering from weak discretionary spending and competition from online stores.

While it is impossible to pick the bottom of the market, there are a number of Australian companies that are attractively priced at current levels and have strong growth outlooks. For those investors with overweight cash holdings, now might be the time to consider dollar cost averaging into the market.

No one can ever pick the bottom of the market cycle and it always seems ‘darkest before the dawn’. It takes a great deal of courage to invest when shares are at their cheapest valuations. Rather than trying to time markets, a strategy of agreeing on a certain percentage of your portfolio always being maintained in shares, property and fixed interest and systematically rebalancing is a far superior strategy. This allows you to consistently buy more of an asset class when it is low and to reduce it when it is high. It takes the emotion out of the process.
We are committed to providing the maximum support and advice during difficult times and encourage you to discuss any concerns you may have with your adviser.

< Back