St Kilda Boat Sales - Financial Year In Review
30 June 2011
Financial Year In Review
Prensented by Alex Moffat, Director Joseph Palmer and Sons (Vic).
During the first two months of the new calendar year investors were happy to price a strengthening of economic activity amongst the major economies into markets. This belief that the recovery had gained sustainable momentum caused borrowing costs to fall and share prices to rise. The expectation of the tightening of monetary policy and cessation of printing money by the major western central banks added to the belief that we had reached the middle and werenow heading out of the woods.
Then civil unrest in Egypt, North Africa and the Middle East caused some concern that oil supplies may be affected and so took some of the bullishness out of the market. OPEC was quick to provide reassurance that it would lift production to meet any gap in supply caused by the unrest. Worries about price rises for agricultural commodities also fed into the slowly dissolving positive sentiment. A strong, and rather unwarranted, rally in silver soon tarnished with double digit percentage moves, up and down, over consecutive days fraying investor’s nerves. That pushed the focus on to base metals which then took their turn at some quite gymnastic volatility. The surge in prices led some policymakers and commentators to express concerns about the possible political and inflationary impact of higher food prices in emerging and developing countries. The factors behind increasing prices for food and other commodities differed somewhat. In the case of food, prices were mainly driven by concerns about low future supply due to flooding in Australia and disappointing harvests as a result of bad weather in the Ukraine, Russia, China and Pakistan. For several commodities, low inventories added to the price pressures. The most visible impact was on wheat, which is one of the commodities most affected by supply concerns.
Japanese sovereign debt was downgraded by Standard & Poor’s in late January and put on negative credit outlook by Moody’s in late February, in part due to the expected increase in the debt-to-GDP ratio. Equity markets reacted negatively to the rating changes, but the response in bond markets was hardly noticeable. Greek debt has been downgraded a number of times to triple C and is now at the lowest rating of any nation which accesses the global capital markets. The Greek population has not yet accepted their situation and continue to demonstrate at the proposed government austerity measures. The market is pricing Greek bonds on the basis of when they default rather than if. The changing global outlook led investors to rebalance their portfolios geographically. This resulted in outflows from equity markets in Asia and Latin America and inflows into developed equity markets such as Australia. Investors remained focussed on public debt levels and fiscal developments in mature economies.
By May the parlous state of Greece and Ireland’s debt positions was back in the news with both countries going back to the European Union and International Monetary Fund cap in hand for further funding. Portugal finally capitulated on their “we are fine” stance and tapped the EU for billions. The US is a cigarette paper away from their debt ceiling of USD14.29 trillion and our own government has pushed us close to the AUD200 billion ceiling authorised by the parliament. The combination of recovery, rising inflation expectations, and a resulting pickup in the anticipated pace of monetary tightening pushed long term government bond yields higher across major mature economies. This occurred in line with the perceived pickup in economic activity and with investors pricing in higher real yields in anticipation of only a very gradual normalisation of US monetary policy. Even the world of sport has not been without its troubles. Qatar has been accused of cheating to gain the right to stage to 2022 world cup……..perhaps they will now go for the winter Olympics.
So there must be some bright spots…..
If the central bankers can manage the US economy to avoid a second dip into recession and a blow-out in inflation then equities are the place to invest. This argument is further supported by the generally stronger corporate earnings and balance sheets. JP Morgan Chase has forecast American company profits will climb an average of 10% per annum for each of the next two years, making companies a bright spot for US market watchers. Throughout history there have been periods of economic highs and lows and yet we have come through them all. Education, technology and communications have transformed the way we live and even now are leading the higher living standards for many Chinese and Indian citizens as well as the citizens of the already developed countries.
The recent buy-backs by BHP-Billiton and JB Hi-I were a boon for pension funds and the recent interim reports from ANZ, Westpac and NAB rewarded investors with increased dividends and stronger balance sheets in their investments. We noted in our 2010 financial year review that the pre-tax yields of our major banks were attractively higher than term deposit rates. This continues to be the case and supports having some funds invested in the banks rather than just with the banks.
Looking forward
We are now just over two years on from the market low of March 2009 with the intervening period seeing the shift of a large amount of debt from the corporate sector to governments. Many governments are still struggling to come to terms with how to deal with this burden. One outcome is that we will again see privatisation of public assets which will shift debt and savings back toward government coffers to address their problems. This process is just beginning in the UK with the proposed sale of the post office (Royal Mail). The next six months are likely to continue to be volatile with little gain made by year end in the stock market. However as confidence returns and companies prosper investment dollars will again seek out opportunities.
We recommend clients use the troughs during this period of volatility to acquire quality investments at bargain prices. We look forward to a prosperous new financial year together.
Alex Moffatt & Rodney Horin
Directors
Joseph Palmer and Sons
Investment Managers . Stockbrokers . Financial Advisers
Level 7, 330 Collins Street Melbourne Vic 3000
Telephone: +61 3 9601 6856
Web: www.jpalmer.com.au
Any views expressed in this review are those of the individual sender, except where the sender expressly, and with authority, states them to be the views of Joseph Palmer and Sons (Vic). Joseph Palmer and Sons (Vic) shall not assume any legal liability or responsibility for any incorrect, misleading or altered information contained herein. Any recommendations contained herein are based on the consideration of the securities alone without regard to the specific circumstances of the reader and must not be relied upon without specific advice from the reader’s securities advisor as to the appropriateness to the reader’s specific circumstances, requirements and objectives. The officers, employees, representatives and agents Joseph Palmer & Sons expressly advise that they shall not be liable in any way whatsoever for any loss or damage, whether direct, indirect, consequential or otherwise arising whether in negligence or otherwise out of our connection with the contents and/or any omissions from this communication except where a liability is made non-excludable by legislation.