Haven’t we seen some fear emerge about the US and European economies, not to mention global financial markets as a result? Drivers are the usual suspects. Below is commentary from Matthew Drennan from Zurich Investments which hits the mark with me.
The key focus for us at the moment is focus on tax efficiency meaning pay down home loans, ensure assets are in the most favourable environment such as super or owned by a the lowest tax person or investment vehicle and have plan B if plan A goes wrong.
As always if you want to discuss this or any other matter please drop me a line or give me a call.
Suspect No.1 – The US
Fears are mounting that the US economy is going into a double dip recession. New jobs created dropped to a mere 54,000 in May (the US needs about 150,000 a month just to stand still). This meant the unemployment rate spiked back over 9%. Worse still it now takes almost 40 weeks on average to find a new job – not a great prospect when you don’t have a lot of savings to rely on.
Not surprisingly, the consumer sentiment index is running at fairly low levels of 74.3. Also not helping is the fact that Government debt is hitting the headlines again courtesy of the fact that the debt ceiling of $14.3 trillion is about to be breached. Without Congress approving an increase, all public servants must be stood down. While many would argue this would not overly impact productivity, try getting your car registered or buying a bus ticket without any public servants around.
Suspect No.2 – Greece
Well more generally the European debt crisis, but Greece is clearly the lightning rod here. Unsurprisingly Greece needs another advance on its bailout package, but what is 12 billion Euros between friends? By now the plan was for the private sector to be lapping up new Greek debt at the 16 per cent yield on offer. Unfortunately, this didn’t quite pan out…
While the next bailout is likely to get up, with assurances of more austerity measures and asset sales, it is a short-term fix only to protect the core European banks who hold most of the debt. Longer term, some rescheduling and / or default is likely with Moodys suggesting a 50 percent chance of the latter.
So what’s all this mean for an Australian investor?
Australian equity markets, and indeed many overseas equity markets, need to go through the same catharsis the Australia dollar experienced. It is much more relevant to us what is happening is Asia and locally than what is happening in the US and Europe. Just because the US equity market is down 1 per cent doesn’t automatically mean our market should follow. And how the European debt crisis still has any shock value left (apart from the countries directly effected) is beyond me.
While the European Union may ultimately need to shrink to its core countries as Greece and others default, the true impact on Australia is likely to be fairly small. Similarly, the US is going through its death throes as a super power. It will still be a massive market of course and produce great new technologies from world class companies. Indeed that is why investors should not ignore certain market sectors, but as an economy it will be lucky to grow at 2 per cent a year and stabilise its debt.
I still believe with the Australian dollar at historical highs and good valuations, global stocks are very attractive. Remember, never let a good crisis go to waste!