Monthly Newsletter - October 2011

Editors Note

This edition includes the regular Inspirational Quote, Funny Picture and Market & Economic Report. This month I have also included an Educational Video about investment.

The global recovery is likely to continue, but the risk of renewed recession in the US and Europe is high. In Australia mining investment is booming but retailing, housing, manufacturing and tourism are likely to remain weak. Given global uncertainty and mixed Australian indicators, the RBA is likely to cut rates before Christmas.

Inspirational Quote

If I had my life to live over, I’d dare to make more mistakes next time. I’d relax; I’d limber up. I would be sillier than I have been this trip. I would take fewer things seriously. I would take more chances. I would climb more mountains and swim more rivers. I would eat more ice cream and less beans. I would perhaps have more actual troubles, but I’d have fewer imaginary ones.

Nadine Stair

Funny Picture

Amazing! They've finally discovered water on Mars! 

Market & Economic Report

Global economy

Review: American economic data remains consistent with continued slow growth. The Institute for Supply Management (ISM) manufacturing survey rose in September and the nonmanufacturing index fell by less than expected. Construction spending gained and durable goods were flat in August after a 4% surge in July, suggesting that US business investment is still in recovery. America’s labour market picked up slightly in September with payrolls rising by 103,000 and the unemployment rate held steady at 9.1%. US retail sales disappointed coming in flat in August and consumers remained pessimistic as evidenced by September’s weak Conference Board sentiment survey. President Obama challenged Congress to pass a US$447 billion stimulus package to give “a jolt to an economy that has stalled”. This package would equate to a 3% stimulus to US Real GDP. At its September meeting, the US Federal Reserve recognised that “there are significant downside risks to the economic outlook”. Accordingly, the central bank launched a modern day ‘Operation Twist’ which involves selling short-dated Treasury bonds from its balance sheet and buying longer-dated securities with the hope that it will result in lower long-term borrowing rates.

In Europe economic data showed continued weakness, with final September purchasing managers index (PMI) manufacturing and services sector conditions indicators coming in at levels consistent with recession, and Euro-zone banks indicating that liquidity and access to finance has deteriorated to levels last seen during the global financial crisis. Germany’s IFO Business Climate Index fell to a 15-month low and German factory orders fell in August showing that Europe’s largest economy is seeing fading growth momentum. Euro-zone parliaments voted in favour of expanding the European Financial Stability Facility (EFSF) to €440 billion. While this is a constructive development, the immediate reality is that Europe is likely to fall into a recession over the next two quarters given budget austerity measures and damage to confidence with recent financial market turmoil. The European Central Bank kept policy interest rates on hold at 1.50% at its September meeting, although President Trichet noted that the central bank staff had “revised downwards” their economic growth forecasts.

Japanese GDP contracted by 0.5% (revised from 0.3%) in the June quarter and Japan posted a return to a trade deficit as the export sector continued to struggle. More encouraging however was the nation’s small business survey which rose further in September, suggesting that Japan is now gradually emerging from a recession that was compounded by the tragic earthquake and tsunami in March.

The Chinese economy cooled to a more sustainable pace in September with manufacturing PMI improving only slightly to 50.9 from 50.7 in July. China’s annual consumer price index inflation also fell to 6.1% in September, adding to confidence that July’s 6.5% marked the peak. On the activity front, fixed asset investment growth, industrial production growth and retail sales growth all moderated further, but remained at relatively robust levels.

Outlook: The global recovery is likely to continue, but the risk of renewed recession in the US and Europe is high.

Australian economy

Review: The Reserve Bank of Australia (RBA) left official interest rates on hold at 4.75% in October but opened the door to an easing by signalling that it is becoming less concerned about inflation and raising the prospect of an interest rate cut to support demand. Australia's economic activity rebounded in the June quarter with Real GDP expanding by 1.2%. While manufacturing and construction conditions weakened again in September, building approvals and retail sales rose strongly in August, the trade surplus in August rose to its second highest level on record, and the TD Securities/Melbourne Institute’s inflation gauge remained consistent with a moderation in inflation pressures. Australian consumer sentiment also improved further with the National Australia Bank business survey showing an improvement in business conditions and confidence in September, and the Westpac Melbourne Institute survey edging up 0.4% in October after an 8.1% increase in September. In addition, labour market data picked up in September with the addition of 20,000 jobs and the unemployment rate falling slightly to 5.2%. Housing finance approvals also improved, rising a seasonally adjusted 1.2% in August and building approvals increased by 11.4% in August. However, the underlying picture for the economy still remains soft, with confidence and building indicators all still at low levels and employment down 5,000 over the last six months.

Outlook: While mining investment is booming, retailing, housing, manufacturing and tourism are likely to remain weak. Given global uncertainty and mixed Australian indicators, the RBA is likely to cut rates before Christmas.

Australian shares

September review: Australian shares experienced extreme volatility during September as global share markets fluctuated on continuing sovereign debt issues in Europe. The S&P/ASX 200 Accumulation Index fell by 6.1% for the month overall.

Short-term outlook: While short-term volatility will remain high with further weakness possible, Australian shares are likely to provide positive returns on a 12-month view. The turn in the Australian interest rate cycle suggests the period of underperformance by Australian shares is over.

Medium-term outlook: Reflecting reasonable growth prospects, medium-term returns of around 10.5% per annum are likely (or 12% if franking credits are allowed for).

Australian bonds and cash

September review: Australian bond markets were volatile in September in line with the global trend. Bond yields fluctuated on the back of safe-haven demand. Three-year Australian government bonds opened the month at a yield of 3.77% and closed 15 bps lower at 3.62%. Ten-year bond yields also fell, opening the month at 4.37% and closing 15 bps lower at 4.22%. Money market yields fell further as the market continued to price in interest rate cuts by year-end. The three month bank bill yield opened at 4.82% and fell 5 bps to close at 4.77%, while the six-month bank bill opened at 4.69% and closed 9 bps lower at 4.60%.

Short-term outlook: Australian bonds are poor value at current yields but they are a good diversifier against global uncertainties.

Medium-term outlook: Returns from local sovereign bonds over the medium term are likely to be low, reflecting low yields.

Key financial markets

The above Market & Economic Report is from Dr Shane Oliver, Head of Investment Strategy & Chief Economist, from AMP Capital Investors Limited.

Educational Video - 3 simple investment rules for hard times

Dr Shane Oliver explains the 3 simple investment rules for hard times. Given recent market turmoil and global economic uncertainty, now more than ever is the time for investors to stick to some basic investment rules, to seek advice and know themselves. Dr Oliver's three fundamental rules are: (1) respect the market; (2) have a disciplined approach; and (3) know yourself and check your ego. 

The above video is from Dr Shane Oliver, Head of Investment Strategy & Chief Economist, from AMP Capital Investors Limited.

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.