Financial Newsletter Sunshine Coast
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The information in this newsletter is current at the time of printing. Contact us for updates.
Australian equity market:
After trading relatively sideways in 2010, volatility is likely to continue into 2011. This is stemming
from the imbalanced nature of the global economy and is impacting on local market sentiment. However positives remain for
Australian companies and the equity market. These are centred on the strong growth in the emerging Asian countries, such as
China and India. Australia’s economic performance has been very solid, driven in part by our exposure to the fast-growing
Asian nations. This has led to a recovery in Australian company profits (see chart below) with a large disconnect now evident
between company profits and the All Ordinaries Index. This historical relationship has broken down, not due to fundamentals
but due to offshore uncertainty. The test for 2011 will be a return of confidence in the global economic recovery and continued
profit growth by Australian companies.
Source: ABS 5676.0 Gross operating earnings, All Ordinaries index, Bloomberg. Earnings to 30 June 2010. All Ordinaries index
to 25 November 2010. Index created starting in 1985 at 10,000.
Past performance is no indication of future performance
AUD at parity:
One of the key events of 2010 was the rise of the AUD to above parity with the USD for the first time since the
local currency was floated in December 1983. Will this continue in 2011? The rise of the Aussie reflects both AUD-positive and
USD-negative factors which looks set to remain the case for the near future. On the Australian side the AUD is being pushed
higher by the rise in prices received for our key commodity exports and the increase in our terms of trade (the ratio of export
prices to import prices) to an all-time high. Higher interest rates in Australia are also supporting the AUD, as is the general
strength of the economy and the need for foreign capital inflow to help us grow. On the USD-negative side is the weakness of
the US economy, very low interest rates and the move to reintroduce quantitative easing (printing money) in an attempt to get
the US economy on the path to a faster recovery.
Overall the rise of the AUD is a positive for Australia.
The higher currency reduces the price of imported goods, both consumer
items and capital equipment, and these lower prices leave consumers and businesses with more money to spend on other good
and services, both those made offshore and in Australia. For those exporters, however, who are not seeing increases in their
prices, the higher AUD makes their exports more expensive to foreign buyers (good examples are manufactured goods and
services such as tourism and education). The strong AUD also holds back returns from global investments for local investors
(that are not hedged) and is once again an important indicator to watch for investment returns and to decide if it is time to take
that overseas holiday!
Official interest rates:
The RBA is concerned that the pace of inflation could exceed its 2%-3% target range over the next few
years given the strength of the local economy, the expected large income effects from the record high terms of trade and the
significant upswing in private capital spending. With limited spare capacity in the economy, the RBA lifted interest rates to more
normal settings and are likely to lift further in 2011 from the current cash rate of 4.75%. Combined with additional rate rises from
the banks, most lending rates (for mortgages and businesses) are now back around average levels. Rising borrowing costs and
signs of emerging cost pressures could start to hurt business bottom lines. It will also impact fixed interest and cash
investments, as yields rise cash investors should benefit.
What are some of the main issues that will continue to impact the investment landscape in 2011?
US and QE2: While the US economy has shown some signs of recovery, the pace of improvement in both the housing and
employment market has remained disappointing, while the pace of inflation continues to decline to very low levels. As a result,
the US Fed introduced another round of quantitative easing (QE2). From November 2010 to June 2011 the Fed will purchase
$US600bn in government bonds, effectively “printing” this money and increasing liquidity into the economy that is designed to
lower bond yields, provide more funds for the banks to lend, help encourage some more “risk taking” by investors and lower the
value of the USD. This is designed to support economic growth when official interest rates are already near zero but many in
financial markets are sceptical about any actual positive impact from this new attempt.
EU debt crisis:
One of the key features of 2010 was the European government debt crisis. This has yet to be resolved despite
both Greece and Ireland accepting a bailout from a combined EU and IMF. A number of European countries, particularly
Greece, Ireland, Spain, Portugal and Italy will in 2011 be introducing very tough spending cuts and tax increases to bring their
debt levels under control. One result is likely to be weaker economic growth in 2011 for some time to come as the government
reduces its role in the economy. The impact on financial markets is uncertain though, the large countries of Germany and
France are benefiting strongly from a weak currency which is positive. However the rest of Europe will face a tough time in 2011
as it works to reduce government debt levels, which will crimp economic growth and leave unemployment at relatively high
The rise of China:
China will once again be a hot issue in 2011. Currently the government is attempting to slow down the pace
of economic growth and cool rising inflation pressures by tightening monetary policy. This is being achieved by lifting official
interest rates, restricting bank lending and requiring banks to hold more capital. The exact outcome of these measures will
impact the investment landscape in 2011, especially for Australia and demand for commodities. China’s economic rise looks to
have many years to go as it industrialises and modernises and as millions of people move from the poor rural areas into the
more productive cities. Reinforcing this trend, China officially became the world’s second largest economy as at 30 June 2010,
taking that mantle from Japan.
Futuro Financial Services Pty Ltd wishes to acknowledge and thank the Investment Markets Research Team at
Colonial First State Global Asset Management for providing content for the preparation of this document.
Disclaimer: This document was prepared by Futuro Financial Services Pty Ltd ABN 30 085 015 (AFSL number 238478) without taking into
account any person’s particular objectives, financial situation or needs. It is not guaranteed as accurate or complete and should not be relied
upon as such. Futuro Financial Services Pty Ltd does not accept any responsibility for the opinions, comments and analysis contained in this
document, all of which are intended to be of a general nature. Accordingly, reliance should not be placed by anyone on this document as the
basis for making any investment, financial or other decision. Investors should, before acting on this information, consider the appropriateness of
this information having regard to their personal objectives, financial situation or needs. We recommend investors obtain financial advice specific
to their situation before many any financial investment or insurance decision.
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