2011 in Review
by Michael Williams, Managing Director and Senior Financial Adviser
2011 saw some significant events happening around the world.
Floods were unfortunately prevalent; not only in Australia, but around world. Japan experienced a devastating display from Mother Nature with an earthquake which shook the nation, whilst our friends over the Tasman fought with natural disasters of their own. A volcanic eruption in Iceland brought our aviation network to its knees, whilst Australia battled with convincing its citizens that putting a price on carbon would be for our benefit, not our detriment. We witnessed the US reach dizzy new heights of borrowing after reaching their debt ceiling and the European debt crisis is still creating a deal of anxiety around the world.
With all the local and international issues which have occurred over the past 12 months, it’s no wonder your average investor has become disillusioned. There is a serious lack of confidence in the share market at present, with many opting to stash all their cash under their mattress.
The share market opened the year at 4,884 points, and will close the year around 4,500 points (although in this volatile market, that number could vary by 200 or 300 points by the time we actually come to a close in 2011). The All Ordinaries index is almost 37% below the peak level of 6,853 points set in November 2007. Considering this, the market would have to grow by almost 60% from its current levels to return to its record high.
When determining the value of their investments, it’s important in these types of markets for investors to stay focussed on their total shareholder return, and not just concentrate on share prices. Whilst returns on shares fell 40% in 2008, they rose by almost the same margin in 2009. If we see some stability return in Europe and the US, investors confidence may return as their equities level out.
The Rising and Falling of Interest Rates
With all the above factors in mind, the RBA continues to reduce interest rates as they charge towards being the cheapest in living memory. In 2010, most economists predicted we would see interest rates rise for the first 6 months in 2011, although in the last two months alone we’ve witnessed two rate reductions of 0.25% each.
Although, this doesn’t mean there will be some sort of dramatic recovery in the market. The indicators rather point towards a slow and volatile uphill battle as confidence slowly returns. The catfight for most investors will be the continuing reduction of rates, which reduces the returns they would have otherwise received from cash and term deposits, which in turn makes the dividend returns they are receiving look attractive.
With inflation cooling, wages under control, unemployment increasing, property prices stagnant and confidence lacking, we would expect interest rates to continue to be cut into 2012.
The lag effect on rate movement is normally 6-9 months to see any real effect, with the benefits being:
• Consumers having more money to spend
• Housing becoming more affordable for owner occupiers & investors
• Business being able to borrow at more attractive rates
With this in mind, we predict interest rates having a positive effect on values for shares and property, however most likely not until the second half of 2012.
Property
Long term averages for annual rises in Australian property prices is around 6%, which is largely in line with household income growth.
If we look at the figures over the past few years, in 2009 we saw Australian property prices rise by 12.1%, in 2010 they grew by a further 5.1%, while in 2011 we experienced a fall in prices.
For 2012, economists are predicting a growth of up to 3%. We would expect the Melbourne market to remain consistent, Sydney to display stronger growth out of the eastern seaboard, and Brisbane to recover well following on from their devastating floods.
With no forced sellers in the market and reducing interest rates, we expect the oversupply in Melbourne dwellings to ease over the next 6 months.
2012 - The Importance of your Financial Strategy
For 2012, it’s fair to say we all want investor confidence to return.
It’s imperative, regardless of your individual circumstances, to ensure you have a Financial Strategy in place, and 2012 is as good of a time as any to ensure you are on your way to meeting your long term personal and financial goals.
