Monthly Newsletter - November 2009

Editors Note

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

World equity markets declined in October as doubts emerged towards month end about the shape and sustainability of the recovery. Australian stocks fell for the first time in eight months in October given the doubts about the US economic recovery and the prospect of more interest-rate hikes in Australia.

Inspirational Quote

My greatest point is my persistence. I never give up in a match. However down I am, I fight until the last ball. My list of matches shows that I have turned a great many so-called irretrievable defeats into victories.

Bjorn Borg (Professional Tennis Player)

Funny Picture

Market Statistics

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

Market Commentary

After a solid start to the month world equity markets, as measured by the MSCI World Accumulation Index (AUD Hedged) declined by 2.0% in October as doubts emerged towards month end about the shape and sustainability of the recovery. Even though there are clear signs that global economic recovery is well underway, the first negative month since February 09 was, in some ways, a reality check where investors looked to question and re-evaluate the robustness of projected company earnings and valuations, particularly with cyclical and financial stocks, on rising concerns that stocks may well be overextended.

In the US, the equity market (in local currency terms) fell -1.9% on the back of a significant drop in consumer spending numbers which in turn raised concerns over the slowdown in spending over coming quarters and its effect on GDP growth. Given that US unemployment is rising and households continue to increase their savings as they remain quite apprehensive about the short-term outlook and their incomes, economic growth is expected to be more moderate, curtailed even further by tight credit conditions.

One of the side effects of the aggressive monetary and fiscal intervention and the subsequent rally in equity markets has been the fall in the $US and the increase in commodity prices, particularly oil which approached $80 per barrel in October while Gold also rose to record levels above US$1,060 oz, reflecting the weakness in the $US. Investors outside the US are taking advantage of this situation by purchasing US companies at very cheap valuations as their buying power is boosted by a seven-month decline in the dollar.

The fall in the US weighed on European equity markets as they fell -2.7% (in local currency terms) led by the falls in financials and weak bank-lending numbers. Ireland fell the most in the region (-11.75%) followed by Finland (-8.8%), Germany and France (-4.9%). In line with the ECB, the Bank of England kept UK interest rates on hold at 0.5% for the seventh successive month as data continues to show that any UK economic recovery remains patchy, but on the improve. The UK market fell by -1.7%.

A shift towards the more defensive sectors saw consumer staples outperform in October (+1.37%) followed by the Energy sector (+1.24%). All the other sectors were negative for the month with the three worst performing sectors being Industrials (-3.7%), Utilities (-5.1%) and Financials (-4.9%) as the concerns of the latter dragged markets down overall.

Australian stocks fell for the first time in eight months in October after investors decided the more-than-50% rebound since March had gone too far, given the doubts about the US economic recovery and the prospect of more interest-rate hikes in Australia. The S&P/ASX300 Accumulation Index slid 2.1%.  

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

Feature Story - 10 Rules for Achieving Financial Freedom (Rule 6)

Follow all 10 rules and you will be on the way to achieving financial freedom.

Rule 6 - Consider the tax consequences

Earnings on investments that come in the form of income such as interest, dividends or rental income - are usually taxed at your marginal tax rate. If you are on the highest marginal tax rate of 46.5% including the Medicare levy, the earnings from your investment can be cut by almost half.

You can claim tax deductions against income you earn from investments (such as the maintenance of an investment property against rental income) and the dividends paid on shares benefit from franking credits passed by the company to shareholders. This can be particularly advantageous for those on low tax rates and those with self managed superannuation funds. Capital gains are taxed at half your marginal tax rate if the investment has been held for at least 12 months.

One way of reducing potential tax costs associated with your investments is to hold them in the name of the partner in a couple with the lower marginal tax rate. That way, earnings such as income and/or capital gains will be taxed at a lower rate.

Considering the tax consequences of investing can significantly impact your wealth creation plans.

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Past Issues

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Important Information

The above information provides an overview or summary only and it shouldn’t be considered a comprehensive statement on any matter or relied upon as such. The above information doesn’t take into account your personal objectives, financial situation or needs. It’s important for you to consider these matters before making any financial decision and I recommend you seek help from a financial adviser.