Watch the Facts not the Stories !
Wow, markets at present are volatile with a 1% or 2% swing almost a daily occurrence. In May the Dow Jones had its worst May in 70 years, the S&P off around 10% over the month and the rest of the Global share markets following suit. However this has to be put into perspective with the market up around 30% over 2009 and rallying more than 50% from the March 2009 lows. Therefore it looks more like a correction at present rather than a full blown bear market, and sure enough June started on a more favorable footing.
The market volatility wasn't confined to shares, commodities (Oil traded from $80 per barrel down below $67 and then back to $75), currencies and bonds all took the full force as a tide of panicked investors all rushed to hit the sell buttons - in some cases too vigorously, one refers to the so called fat finger trade involving Proctor & Gamble where at once point the share price was down over 40% intra day. Indeed some shares traded as low as 4 cents on the day from around $20!
However at times like this it is very important to separate the fact from the fiction or the 'rumors' - these 'rumors' feed the fear and seem to have greater importance in an already nervous market. It is very easy to put 2 and 2 together and get 5 or even 6, and then for these to be reported over the newswire and before we know the market is off 2%. Then actual is released and surprise China has better than expected exports data and the market rallies hard on the back of the actual facts. The recent facts are, the US reporting season from the US saw around 80% of the S&P 500 companies beat their estimates. Over the past 2 months nearly 500,000 new jobs have been created in the US, and evidence suggests there is more to come. Many of the emergency measures implemented by the Fed have either been stopped or removed with little market impact or press coverage. Many of the big US banks have paid back their TARP (Troubled Asset Relief Programme) funds and the US Government has sold down part of its Citibank holding - most have been sold at a profit for the Government from their initial levels.
China's economy continues to grow at a good pace despite the recent attempts to slow it down , therefore they will still demand minerals and resources from Australia - and despite the proposed super tax the companies will still make a good profit and the improved infrastructure may well benefit them in some ways.India is still forecast to grow at 7-8% per annum; this together with China will see Asia as the driver along with the US of the Global economy. Environment is still favorable for growth, at present we prefer to buy dips rather than sell rallies; core long positions will perform well in these conditions.
There appears to be some movement from the Australian government on the 'Super Tax' which added with the Chinese growth story has seen mining companies rally. The GDP figures out of Australia are still just above trend even after the raft of rate increases.
On the domestic front we have seen the first rate increase in almost 3 years, this should be viewed as a positive with the RBNZ of the opinion that there is sufficient inflationary pressure within the system to warrant a rate increase. The question now is how high and fast will they move? Common consensus appears to point to a market neutral rate of 5.0% - this is where there is neither a stimulatory or restraining impact on the economy. This could see a major impact of Fixed income portfolios as rates increase so the capital value will come under increasing pressure.
On the flip side the annual resets could benefit from the rate increases which may see some re-balancing of portfolios . I don't think the average investor has taken this on board as it has been so long since they had to deal with this issue they may just have forgotten. It could have a major impact and needs to be reviewed as soon as possible call us at Bay Financial Partners to discuss the potential impact.
The NZ dollar has rallied on the back of the rate hike but longer term it still looks as though the direction is lower, it has strengthened against most of the major currencies, making exports more expensive (and off shore shares cheaper), which may work against the NZ economy in the long run. The big cushion is being provided by Dairy with Fonterra forecasting a pay out for next season of around $6.90 to $7.10 but with a potential of an $8 payout if conditions permit. This is estimated to put around $1.5 billion into the economy.
As always you really need to separate the fact from the fiction before making investment decisions especially in these markets or just call a Bay Financial Partners' Adviser on 0800 867 323 to get the real story.
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