Markets Update: A Look Back, A Look Forward

After a tumultuous year in financial markets, Scott Osborne, Head of Income Strategies at BT Investment Management (BTIM) shares his lessons from 2008 and what he's looking out for in 2009.
By: BT Financial Group
 
Jan. 29, 2009 - PRLog -- The economies

The start of 2009 sees all the big economies - the US, Europe, China - in slowdown mode. This is a flow-on from the 'credit crunch' which has made it much harder for companies and individuals to get credit. Consequently this is affecting consumer spending and hurting sharemarkets because consumers aren't buying at the level expected by companies and so their profit outlook - and their share prices - are falling.

The most important of the global economies, the US, is in recession. The question is how deep and for how long? It's likely the new Obama government will come up with a variety of significant economic stimulus packages. The size of those packages - and where the money goes - will determine the depth and length of that recession.

Last year was a tough one for investors in shares. Australia's S&P/ASX200 was down around 40%, Listed Property Securities off 50% and international shares lost around 40% of their value (in US dollar terms). However, 2008 did prove the value of diversification. Australian Bonds delivered an excellent return of around 14% and the cash rate returned around 7% for the year.


What to watch in 2009

Given the action over the past few months, what are the indicators investors need to watch? Firstly, around the world we have seen some big interest rate cuts. These always take time to feed into an economy. The big thing to watch is the effect of the interest cuts we have already seen and how quickly economies around the world react to the different stimulus packages already in the mix.

By historical standards, governments, central banks and regulators have thrown everything they have at their economies in an effort to limit the damage from this crisis. So while the first and second quarters of 2009 may be quite difficult all over the world, we're likely to see some improvement in the second half of 2009 as all these 'growth' policies start to bite.

There are a few key indicators we are watching carefully. Firstly, we want to come to grips with the size and strategy behind the various stimulus packages to be announced early in 2009. Then we're looking for improved lending conditions.

At the moment US banks are not lending. When they start to put money to work again, things will start to improve. The other big litmus test is US housing, which is a huge problem for the US economy. We'd like to see some more stability in US house prices where there has been a lot of wealth destruction. Once we see a drop in the level of forced sales and foreclosures - which means people are again able to meet their loan repayments - we'll know that all those stimulus measures are starting to take effect.


Australia versus the world

What does all this mean for the Australian economy? Over the past three months we have seen a full 3% cut in interest rates. That's historically fast rate-cutting, but it will take a while to have an effect. Measures such as the $10 billion stimulus package announced by the Australian Government and a whole range of infrastructure projects, direct payments and tax cuts should also start to have a stimulatory effect.

Australia's big advantage is the strength of our banking sector. Our banks were much more conservative than their global peers and not so involved in the structured financing and repackaging we saw overseas. So while Australian banks are getting pickier, they're still lending.


The markets

As mentioned earlier, the news in early 2009 will look grim. It will certainly be a slow growth environment. But the markets have priced a lot of that in so we may start to see signs of a bottom in the equity markets. Bond and cash rates are likely to continue to fall.

In Australia the cash rate has already fallen from 4.25% to as low as 3% and we expect another rate cut of 0.5% in February. We may see the start of a strong rally in the mid part of 2009, because valuations in shares and property are now very attractive and some quality assets have been oversold.

Credit markets (where companies borrow money) have been highly stressed but in 2009 high quality corporate debt could offer good returns.The big banks, Woolworths and BHP have been victims of a lot of selling pressure in the market but are now priced very attractively.


Lessons from the credit crunch?

You need diversification - both within funds and within your overall portfolio. It's a cliché but it's true, you need to spread your risk. The second big lesson investment professionals have re-learned is: don't fall in love with a position. You always need to be looking at what's changing in the market and at what could affect the value of your investment. It's easy to make a decision based on current information, but you have to work very hard to monitor and manage that position as things change. You need to constantly question your own ideas and beliefs.


Q&A with Scott

Q: Cash versus shares?
A: Just as it was a mistake to be obsessed with shares in the boom times of the previous five years, it's a mistake to be obsessed with cash now, especially as interest rates have fallen so far and have further to fall.

Q: Best investment decision?
A: Early in 2008 we made a conscious decision to add more liquidity (cash) to our portfolios. For a while there that looked like it would cost us performance, but in the end it really paid off. The big benefit of high liquidity was twofold: we always had money to meet any investor redemptions, and we had cash on hand to buy quality assets as they became a lot cheaper!

Q: If you had $10,000 to invest now where would you put it?
A: Well 2008 was a long year so I'd invest some of it in a holiday. I'd also finally buy the iPod I've been eyeing for months. But I'd invest the rest in high quality corporate debt, because the returns from that area look promising for the next two years.

Q: Investment mantra?
A: Cash isn't always a king, but it's often your friend.

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Scott Osborne has been working within the Westpac/BT Investment Management http://www.bt.com.au/ fold for around 20 years. He is responsible for BT Investment Management's investment strategies and execution within the cash, bond and credit fields and his team recently won the Money magazine Best Cash Management Trust award for 2008.
End
Source:BT Financial Group
Email:***@btfinancialgroup.com
Zip:2000
Tags:Investment, Investors, Financial Market, Financial Crisis, Markets, Share Market, Australia, World Economy
Industry:Banking, Financial, Business
Location:Sydney - New South Wales - Australia
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