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News Bulletin : ADA News Bulletin December 2011
49 DECEMBER 20 11 investment insight • Australia's population continues to grow, albeit at a slower rate than in previous years which helps meet increased employment demands and creates more domestic demand for Australian goods and services. • Australian shares look very cheap when compared to bonds. Dividend yields on Australian stocks now exceed the yield on 10-year government bonds which usually means that shares are a buy. • The country's strong fiscal position and a positive outlook for Australia relative to the world have allowed the Australian dollar to become a de facto reserve currency which encourages foreign investment in Australia. • Australia's inflation rate is low and is within the range expected by the Reserve Bank of Australia. • Expectations are that central banks will stimulate economies with printed money at the slightest hint of trouble. This has the side-effect of increasing demand for assets such as shares. A further round of quantitative easing (QE3) is already being mooted for the US and the new head of the European Central Bank (ECB) is considering such a strategy for Europe. THE BEARISH CASE FOR AUSTRALIAN SHARES • Australia has a high level of political uncertainty given the level of dissatisfaction with the current government. Australia also has a relatively new and untested government in NSW, its most populous state. • Australia has a high degree of tax uncertainty as the effect of the new minerals resources rent tax and the Carbon tax are yet to be determined. • Australia has an increasingly uncertain labour environment with industrial action on the rise. • Uncertainty stymies new investments as investors are unable to quantify and assess risks so they choose to do nothing. • Australia's strong currency can also act as a disincentive to invest in Australia as the cost of investments rise for foreign investors. A strong currency also hurts key export industries like agricultural and automotive manufacturing making Australian products less price competitive in overseas markets. This can result in a two-speed economy with our resources sector doing well at the expense of the broader economy. • Continuing problems in Europe over sovereign debt could result in the breakup of the EU and cause massive losses for European banks which will trigger a global recession or a second global financial crisis. • Massive debt levels in the USA cannot be solved by printing more money or issuing debt. Issuing more debt to solve the problem of too much debt is a folly and tough economic austerity measures have to be taken to address the debt problem. • The long-term bull run in Australian house prices has ended and the property market is currently substantially overvalued. This could lead to a period of falling property prices which would lead to bad debts for our banks and a huge jolt to consumer and investor confidence. Australia's high level of home ownership could magnify the impact of falling house prices on the economy. As you can see there seems to be a strong case for the arguments both for and against shares. There seems to be no shortage of predictions about what is going to happen next year and that is because people love predictions. Behavioural scientists have discovered that most human beings have a strong dislike for randomness and a corresponding overwhelming desire to believe Keep your portfolio well diversified and remain firmly focused on your financial goals while remaining comfortable in the knowledge that your patience will be rewarded. we are in control. 'Knowing' that the ASX200 will close at 5500 next year gives investors that feeling of control. As we all know the feeling is often illusory as the predictions giving us the feeling of control are often wrong. Personally, I am bullish on the investment future of Australia. I believe that markets will remain volatile whilst the European situation plays out. But if you wait for that day when economic conditions are certain you will be buying shares at much higher prices. I am heartened that one of the world's canniest investors Warren Buffet invested 23.9 billion USD in stocks in the last quarter -- the most in 15 years. His rationale was he felt stocks were on sale. Perhaps the best strategy is to continue to accumulate shares in quality Australian companies on a regular basis and be confident that over time this is the only way to build lasting wealth. As you settle into those lazy days of summer, sit back, relax and try to avoid the headlines about the end of the financial world. Largely this is noise, serving as a distraction to keep you from achieving your long-term investment goals. Keep your portfolio well diversified and remain firmly focused on your financial goals while remaining comfortable in the knowledge that your patience will be rewarded. SEASONS GREETINGS I would like to take this opportunity to wish all of my readers a very Merry Christmas and a safe and happy New Year. The information contained in this article is believed to be accurate. To the maximum extent permitted by the law, 2020 DIRECTINVEST (AFSL 244 249) disclaims liability for errors in, or omissions from, this article. In no way should this article be construed as providing securities advice or an endorsement or recommendation of any security or product. In preparing this article we have not taken into consideration your investment objectives or your investment needs and make no representation as to the suitability or otherwise of any product, or security, to you. Michael Lannon is the Executive Director of 2020 DIRECTINVEST, an ADA Partner service specialising in the provision of execution only DIY investment services. For more information or any questions please contact Michael Lannon on 1800 352 021 or visit 2020's website on www.2020DIRECTINVEST.com.au or email: firstname.lastname@example.org
ADA News Bulletin November 2011
ADA News Bulletin February 2012