Monthly Newsletter - February 2009

by Andrew Newman
in Newsletter
28 Feb 2009 | 0 Comments

Editors Note

This 1st edition includes an inspirational and funny quote, the main market index returns during January 2009, a market commentary and a feature story. I encourage you to make comments.

Inspirational Quote

If only the people who worry about their liabilities would think about the riches they do possess, they would stop worrying. Would you sell both your eyes for a million dollars, or your legs, or your hands, or your hearing? Add up what you do have, and you'll find that you won't sell them for all the gold in the world. The best things in life are yours, if you can appreciate yourself - Dale Carnegie.

Funny Quote

I'm an excellent housekeeper. Every time I get a divorce, I keep the house - Zsa Zsa Gabor.

Market Statistics

The table below shows the monthly returns for the main market indices during January 2009.

Market Index	Jan 09
S&P/ASX 200 Accum	-4.88%
Dow Jones	-8.84%
S&P 500	-8.57%
Nikkei	-9.77%
AUD/USD	-9.27%
Oil	-6.55%
Gold (USD/oz)	5.19%

Market Commentary

World sharemarkets, as measured by the MSCI World (AUD Hedged) fell by 7.4% in January. After a rally in early January, any gains were quickly eroded by month end with further uncertainty created by the spate of negative economic news that confirms the severity and depth in the deterioration of global GDP as we head into 2009. Furthermore, markets were focused on the extent of the potential fall in corporate earnings as we progress into the 2008 reporting season. Thus far, results have been mixed across sectors with a number of profit warnings and very little visibility into 2009 earnings as many companies refrain from giving guidance to the market in such difficult economic conditions.

Global banks continue to report further losses and adversely affect equity markets around the world. Despite multi-billion dollar bank bailouts and a series of record rate cuts in 2008, banks remain unwilling to increase lending as they try to improve their capital structure and avoid risk. The rationing of loans by banks has effectively starved business and households of much-needed credit which in turn has worsened the property market and employment conditions. As reflected in the recent results of Royal Bank of Scotland with a forecast loss of $41 billion for 2009, the Financials fell by 15.6% in January, by far the worst performing sector for the month.

As several major corporations announced job lay-offs in January, the US economy has seen significant deterioration in consumer demand, profit margins and capital expenditure, all reaching lows not seen for decades. The US equity market fell 8.2% over January (local currency) with the historical inauguration of US President Obama having little positive effect.

In Europe, equity markets retreated by 6.1% with the major Euro countries such as Germany, France, Italy and Spain falling the most, as export orders decline. In the UK, the equity market fell by 6.5% over increasing concerns about the economy and the state of the British banking sector. Recent results showed that UK GDP fell 2.5% in the December quarter requiring the Bank of England to cut the benchmark interest rate to 1.5% in an attempt to slow down the sharp rate of recession. In Asia, weakening industrial production and export growth confirm recessionary conditions as Japanese equities fell by 7.7%, Singapore conceded 1% and Hong Kong posted a gain 0.5% over January.

In Australian stocks fell for a fifth consecutive month in January after companies issued earnings downgrades and announced capital raisings, dire economic reports pointed to prolonged recessions here and overseas and renewed troubles for foreign banks raised questions about Australian banks. The benchmark S&P/ASX 300 Accumulation Index fell 4.8%.

The Market Commentary has been sourced from Global Value Investors Ltd and Barclays Global Investors.

Feature Story - The great bargain hunt

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." Warren Buffett

It's ‘sale' time

How often have you waited for the sales to buy something you've been thinking about for a while? You may have needed a new car, a fridge, or even a bigger house, but managed to hold out until the price was right. And when you eventually bought the item, it wasn't so much that it was cheap, but more that it was a good price compared to the value of the item.

We now have a similar situation with our sharemarket. In a bear market, like the one we are experiencing now, the prices of investment assets have fallen substantially. This has occurred across companies, sectors and asset classes. What's important to note is that even high quality companies, with sound business foundations and a bright future have significantly fallen in value, even when they are vastly superior to weaker companies.

That's why a bear market offers you the opportunity to buy quality assets at highly discounted prices and lock in potentially outstanding returns. Take a look at the following table. As you can see, even the companies traditionally perceived as ‘blue chip' have fallen dramatically in price.

The great bargain hunt

When is a good time to buy?

First of all, it is never a good idea to try to time the market. Even professionals with many years of experience don't get it right all the time. However it does make sense to consider buying when the markets are at such extraordinary low levels. Here are four good reasons why:

1. Prices have fallen too far.

In the year to end November 2008, the value of Australian shares (as measured by the ASX S&P 200) fell almost 50%. Yet compared to most economies, Australia is in good shape. Inflation is under control, unemployment is still low and the banking sector sound. Many Australian companies have become dramatically cheaper, as you saw in the table above. It's important to remember that buying quality assets cheaply doesn't just leave more room for prices to rise - it also reduces your risk because the room for prices to fall is also smaller.

2. Income returns are still attractive.

Now that share prices have fallen, the income you get from some quality Australian shares is particularly attractive. Yields of around 7% mean you're earning a return better than many high interest cash accounts. However, you also have potential capital growth to add to that income. Just as importantly, many quality Australian companies pay fully franked dividends - so the income you receive is much more tax effective than from cash.

3. Help is on the way.

In recent months we have seen Central Banks and governments around the world slash interest rates, pump more money into their economies and bail out or buy stakes in a number of large financial institutions. All these institutions are committed to fixing the crisis and using whatever measures possible to restore confidence in the global financial system. History suggests that once these measures start to gain traction, investment markets respond positively and returns bounce back.

4. Take a look at the Price to Earnings (P/E) ratio information.

The P/E ratio effectively compares the price of a share with the earnings it generates. The higher the ratio, the more you are paying for the earnings of the company, although it can also indicate that investors are optimistic about the potential of that company.

The combination of these factors - bargain prices, attractive income returns and government support - provide a compelling reason to ignore all the negative noise and buy quality assets, but where do you start?

How to find the bargains

Senior Investment Strategist at Advance Asset Management, Felix Stephen, says that while there are a number of buying opportunities, you should accept that the volatility we have seen recently will continue for a while, so you need to be patient and to hold your nerve.

If you're ready to get out your wallet, then Felix says that a good place to start is with large stocks, as they tend to outperform smaller companies in uncertain times. "In the medium term, Australian insurance, telecoms and healthcare companies should generate steady returns as should companies that sell consumer necessities," said Felix. "Companies that sell discretionary or luxury goods, property trusts, industrial companies and transport and infrastructure businesses may struggle in a slowing economy where high debt levels are a handicap."

Felix also believes that the recovery in the Australian share market will be led by banking and financial stocks. "While weaknesses in the global financial sector is one of the root causes of the current crisis, I'm confident that Australian financial companies have been dramatically oversold and now that all the potential negatives about these companies are priced in, many offer exceptionally attractive tax effective income," said Felix.

Managed funds

Managed funds offer diversification and specialisation across companies, sectors and asset classes. Over the next few years the investment environment will offer significant opportunity but it will be volatile. To take advantages of these opportunities fund managers need to ‘rotate' quickly between companies and between different market sectors and geographical regions. That's why investors need managers who are experienced and nimble, and, above all expert stock pickers - able to pick the individual companies likely to prosper in changeable market and economic conditions.

Heading out to shop

Yes, there's a lot to consider and it can get a bit confusing. Buying bargains is hard work, particularly when markets are volatile, and you may have to be brave with some of your decisions. As always, you need to consider your own risk profile and investment objectives.

This feature story was prepared by Securitor Financial Group Ltd, who is owned by Westpac Banking Corporation.

Tell A Friend About My FREE Blog

Click Email A Friend to complete a form and your friend will be emailed a link to subscribe to my FREE Blog.

Past Issues

Please click on the Newsletter category on the left or click Newsletter Archive to view past issues.

Important Information

Information provided in this newsletter is general in nature and does not constitute financial advice. While I have taken reasonable care in providing this information, it should not be construed as being specific to your investment objectives, financial situation or particular needs. It's important for you to consider these matters before making any financial decision and we recommend you seek financial advice.

Monthly Newsletter - February 2009

Leave A Comment