28 September 2011 Swimming against the tide Martin Becker Introduction For the investor, what matters most is the market’s primary (secular) trend, not the day-to- day (cyclical) trend. If you stand on shore and look out at the ocean, it is impossible to tell at any given moment whether the tide is coming in or going out. By the same token, watching the action of the stock market on any given day, it is equally difficult to determine whether it’s a secular bull market or bear market. But the fact is that the tide of the market is always either coming in (bull market) or going out (bear market). It’s the determination of the major trend which is so difficult. Yet that determination is critical. This is made more difficult by the financial media, who today reports in near real time, ignoring the markets longer term cycles. Long Term themes that will impact investment returns over the next 5 years To determine the market’s primary trend over the next 1 to 5 years, a useful starting point is to digest the day-to-day news and summarise the major themes influencing our environment that will act as key drivers of financial market direction and performance:Moore Stephens SydneyWealth Management Pty LtdLevel 7, 20 Hunter Street 1. Global Financial System: Europe and the US are likely to remain economicallySydney NSW 2000Australia stressed with lower economic growth due to (a) the undercapitalisation of the bankingTelephone: +61 2 8236 7700 system and the apparent lack of effective policy action in Europe, and (b) a period ofFacsimile: +61 2 9233 firstname.lastname@example.org deleveraging and reduced confidence ahead in the US. This is likely to result in lowwww.moorestephens.com.au growth for much of the developed world forcing investors to look to emerging marketA member of the MooreStephens International Limited countries and themes for higher levels of growth and investment returns.Group of Independent Firms.Moore Stephens SydneyFinancial Advisors areAuthorised Representatives ofMoore Stephens SydneyWealth Management Pty Ltd,AFSL Licence #336950.
2. A Euro Zone restructure: The financial turmoil in Europe is no longer a problem of small peripheral economies like Greece; risk has now spread to the larger economies of Spain and Italy. This places the common currency and Euro zone structure itself under threat which could result in a restructure of the European Union to include a group of countries at similar stages of economic development.3. Regulation of the Financial Sector: With the tightening of regulation governing the financial sector, as well as a new focus on reducing debt and increased savings, the financial sector is likely to generate lower earnings growth and investment returns than those enjoyed over the past 10 to 15 years.4. Heightened Volatility: As a result of high levels of private and public debt around the world, reactive monetary policy settings and government intervention, as well as a lower tolerance for risk amongst investors, we should expect a more volatile global economic and investment environment. Going forward, the new focus for investors should be on capital preservation and structuring equity holdings for quality (invest in businesses that are leaders in their industry, with strong balance sheets and generating sustainable profits) and for yield.5. Growth in Emerging Markets (in particular Asia): As a result of rapid and continuing urbanisation and industrialisation in the emerging world, economic growth rates in emerging Asia is likely to be 2 or 3 times greater than the developed world. In addition, emerging economies have displayed strong economic management resulting in low levels of debt and cheap currencies. This does suggest that Asian equity markets will continue to outperform developed markets over the longer term.6. Demand for commodities to stay strong: China’s industrialisation and consequential demand for industrial commodities and energy indicates continued support for the demand of hard and soft commodities as well as energy. Notwithstanding cyclical fluctuations, the longer term trend in commodity prices is therefore likely to stay strong.7. Inflation: Without further quantitative easing, inflation is likely to remain low or negative over the next 1 to 2 years due to an increase in spare capacity, lower household spending, reduction in bank lending and rising unemployment.8. Social unrest: The uneven distribution of wealth and income coupled with further economic weakness is likely to raise social unrest and crime rates.
Portfolio ConsiderationsThe consequences for portfolio construction and implications for investment markets as aresult of the long term themes discussed above are: likelihood for lower investment returnscoupled with higher volatility; reduced appetite for risk with a focus on the preservation ofcapital; a preference for investments which offer attractive income yields; and seekinggrowth opportunities within each geographic and industry sector.The Australian DollarThe Australian Dollar is caught between two opposing forces: (a) a slowing global economyand the resulting fear that may result in a fall in commodity prices with the consequentialweakening in the AUD, and (b) on a relative basis against the USD, EUR and GBP, acombination of long term debt problems with the potential for more quantitative easing willkeep these foreign currencies weak in both absolute and relative terms against the AUD.Ultimately, the Australian dollar is likely to benefit from the long term demand forcommodities. Hence despite an uncertain short term outlook for the AUD, the longer termoutlook remains positive.
For more information please do not hesitate to contact one of the following members of our Wealth Management team: Charlie Viola +61 2 8236 7798 Director Martin Fowler +61 2 8236 7776 Director Martin Becker +61 2 8215 7920 Associate Director Haris Argeetes +61 2 8236 7851 Manager Disclaimer The information provided is not personal advice. It does not take into account the investment objectives, financial situations or needs of any particular investor and should not be relied upon as advice. While the information is provided in good faith and believed to be accurate and reliable at the date of preparation, we will not be held liable for any losses arising from reliance thereon. We recommend investors consult their personal financial adviser to discuss suitability and application to their individual circumstances. Articles represent the opinion of the author, Martin Becker, and may not necessarily be representative of the views of Moore Stephens generally.4