Financial Newsletter Sunshine Coast

Welcome to Unique Financial Partnerships, keeping you up to date with all financial planning, self managed superannuation funds, tax minimisation, life insurance, on the Sunshine Coast and around Australia.

The information in this newsletter is current at the time of printing. Contact us for updates.

The banking crisis caused a major liquidity squeeze across a number of industries such that the global economy now faces a decline in global growth for 2009.  

Given the extent of the falls and the on-going poor economic news that continues to dominate, we felt it was interesting to note how the markets have historically responded after such a negative year.   When a market falls as much as it has it is always difficult to imagine a rebound and there are always good reasons not to invest.  Investing in 1930 during the height of the depression or during 1974 during the OPEC oil crisis, or 1941 during WWII would have been extremely difficult however all proved to be excellent times to invest. 

Most companies are currently engaged in a rapid reduction of their cost bases and at the same time the Governments and central banks are trying to stimulate demand.  While such fiscal stimulus can take some time to take effect, once it does the additional boost to revenue has historically had a much greater impact on profits as companies tend to hold down their cost bases. The market then would typically re-rate such a company meaning that the initial bounce out of a bear market would reflect not only a bounce in earnings but also a re-rating of the stock itself.

We acknowledge that in the midst of such uncertainty and volatility it can seem as through such share price bounces are a distant proposition.  With that in mind below we provide our thoughts as to the key drivers which may provide additional support for markets.

1. Improved economic data.  The economic data does not have to be positive, merely less negative.  While the rate of economic deterioration has been accelerating over the past few months we are cautiously optimistic that the very expansionary fiscal and monetary policy settings will provide support to the economy going forward.  Some crucial statistics which will provide support for markets include: a slow down in the fall in US housing prices; a slowdown in the fall in new housing starts particularly in Australia; and potentially most importantly, improved sentiment both at a consumer and corporate level.

2. Valuation support. Valuations are very supportive of equities, especially when compared to returns available from cash and Government bonds.   While a number of companies are preserving capital by cutting dividends the forecast dividend yield is still around 8% (including franking).  The differential between this yield and the cash rate (3.25%) and bonds (4.2%) has never been higher. As the cash rates continue to decline the logic behind increasing an investment in riskier assets becomes compelling.   The chart below highlight the difference between the yield available from dividends compared to the yield available from cash.

This difference has never been higher and while dividends are likely to continue being cut as companies conserve capital, the valuation support is extremely compelling.

3. Cash weightings are high.   Not surprisingly given the volatility and uncertainty being experienced in financial markets, cash deposits being held by banks have increased substantially over the past year. Some estimates have deposits growing at more than 30% pa as investors hoard cash.  This is a logical response to the current uncertain environment however, as the cash levels build and interest rates decline, the pressure to invest these funds in assets with higher potential return builds.

4. We are coming to the end of a deluge of capital raisings.  As this round of capital raisings come to an end we would expect the market to bounce as selling pressure to fund more raisings eases.  Australia has been more aggressive at raising capital and thereby “fixing” their balance sheets than a number of global peers. Since June last year ~$38 billion has been raised by our market by way of DRP's, placements and entitlement issues.  The market value of the top 100 companies is ~$706 billion. So put another way an average company had raised 5% of its market value. This is material given that many large companies are well capitalised and did not raise capital at all.

We would like to thank DNR for contributing to part of this presentation    

Disclaimer
All representations and information contained in Futuro in Focus are made in good faith and are believed to be correct at the time of preparation. Articles are of a general nature and they do not purport to be specific investment advice. Individual needs or other considerations have not been taken into account, thus information contained herein should not be relied upon as a substitute for detailed advice. Futuro Financial Services will receive fees or brokerage from the provision of advice or placement of investments. You may, by contacting our Privacy Officer on 07 3018 0400 or by writing to Futuro Financial Services Privacy Officer GPO Box 942 Brisbane QLD 4001, request not to receive further editions of Futuro in Focus.