Call us on 1300 794 893

Your Money

Managing money

The financial year has ended and although a better one lies ahead, I think we will have some dramatic moments before good sense and fundamentals prevail. The credit crunch followed by the oil price spike could not have come at a worse time but, to me, there is something perverse about the whole conflict.

Important question

In a nutshell, I ask, if the credit crunch is bad enough to threaten recession on the US and possibly the world economy, then why is the oil price rising? The answer is two-fold. Firstly, China, India, Brazil and Russia - countries often called the BRICs - are expected to keep on growing at fast rates, despite a US slump.

Secondly, Europe is more worried about inflation than an economic slump, and the central bank for the EC is more likely to raise interest rates than cut them. (That was the position before my deadline but it indicates that there isn’t a worldwide panic about a global recession.)

Movement to the positive

There are reasons for the terrible performance of share prices and the failure of credit markets since the ‘crunch’ is critical. Recently, I saw that Ralph Norris of the CBA said this money market seizure could last into 2010. I hope that he is wrong.

Certainly, it will take time to sort out and, as the signs improve, the consensus will move from negative to positive.

At the moment we’re hearing influential commentators talk about their well-connected contacts who say this and that and no one well-connected is saying anything positive on the rumour mill.

Keep in mind

Remember this: there are a lot of hedge funds and investment banks out of the money that can spook and influence market sentiment. If they’re successful, they can make a lot of money and improve their poor, money-losing positions.

My attitude when things get tough is to go back to what my attitudes are to investment and wealth building. I am a long-term investor, accumulating great quality assets that have a history of doing very well over the long-term.

US taking action

I don’t believe the US will stand by and let the current malaise continue. Bill Gross, who is the bond and interest rate expert par excellence in the USA, recently wrote a letter to Senator Obama, as though he was already president, bagging his predecessor recommending a $500 billion fiscal spending program to get the USA going again.

He also noted that the US bond yields were at the bottom and would start to rise, which is a more positive sign for an economy heading towards slightly better times.

This past financial year saw soaring commodity prices – especially oil. On top of that, the US sub-prime rocked financial markets. The Australian stock market recorded its worst annual decline in 26 years. Before that, we had four years of gains of more than 20 per cent – the strongest sustained period of gains in 20 years.

History repeats
Craig James recently made the point that the share market falls on average once every four years.

For the record, he noted that the resources sector became the largest share market sector, passing financials for the first time in 21 years.

In times like these…
Residential property was the best performing asset class in 2007/08, ahead of cash and bonds, with shares having a shocker.

But all of this happened with the worst credit crunch in my lifetime, the US housing sector in its own personal recession and our Reserve Bank lifting interest rates on four occasions during 2007/08, which meant our economy has slowed in response.

I think a lot of these negatives will be less prevalent going forward. Bad company reports and company write downs will be made and, gradually, the blue sky will make breaks in the black to grey clouds that dominate.

Sitting pretty

That’s when I want to be holding great pieces of Australian industry - solid banks, retailers we all use, and resource stocks that will cash in on the new era of the BRICs.

If you are doing things right - and that’s what we aim to do at Switzer - the long-term trend will be your friend. And in troubled times for some asset markets, that’s when you should be glad that we always push diversification of assets.

Let’s hope that positive news starts making a dent into the negatives that are a little too numerous for my liking

Published on: Wednesday, July 02, 2008

blog comments powered by Disqus
Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300