Download The sun peeks through

Issue 10 • Brought to you by Financial Wisdom
The sun peeks through
It has been a tumultuous financial year. We take a month by month look at the
market, rates and big events of the last 12 months and some of the lessons we’ve
learned along the way.
The last year has been one of the most tumultuous ones in
memory, and has had more twists and turns than a thriller.
There are many lessons to be learned from the market
movements of this last financial year, and sticking to your
guns is probably one of them.
funds and further policy stimulus. Their actions were real rather
than symbolic. In May, a ‘stress test’ of US banks showed
some were still not adequately capitalised, although the figure
was below market expectations. A plan was put in place to lift
capital and more optimism started to shine through.
The financial year started with sharemarkets in decline, and
many wondered when the cycle would turn. However, people
were more worried about the Olympics and the Beijing fog than
Freddie Mac or Fannie Mae. But that all changed in September,
and in a very dramatic way.
Rebounds and reactions
The subprime lending problems, which were affecting
sharemarket confidence, became a crisis when it became
apparent US home lenders Freddie Mac and Fannie Mae were
in trouble. Lehman Brothers collapsed. All of a sudden we
had a world-wide ‘credit crunch’. The fall of one prestigious
investment bank and the problems now apparent in other
foreign banks led to a global loss of confidence and many
stopped lending to each other.
Credit crunches markets
Australia wasn’t spared. Mortgage lenders like RAMS and banks
like St. George and BankWest were bought by competitors.
Internationally, names like Merrill Lynch and HBOS disappeared.
Never has banking changed so dramatically, so quickly. There
is no wonder politicians were talking about the global financial
crisis and the worst global recession since the Great Depression.
Governments around the world worked together in a
substantial way. Interest rate cuts and stimulus packages by all
the major economies were announced, and relationships with
China were strengthened. By the beginning of 2009, there was
still gloom and in February, the International Monetary Fund
(IMF) was predicting a global recession.
The most telling turning points came in March and April. The
US treasury announced a Public Private Investment Program
worth up to $US1 trillion to buy ‘toxic assets’ off bank balance
sheets and find a legacy price for these assets. Sharemarkets
moved off their lows. The G20 meeting in April pledged more
Australian sharemarkets have since rebounded. There has been
a 27% rise between 6 March and 30 June 2009. Inflation has
retreated and the Australian economy has remained relatively
resilient. The Dow Jones also rallied 29% off its low, and the Listed
Property Trust Index has also turned around, even if only slightly.
Market talk has now turned to what type of recovery it will be –
a sharp turnaround or a more gradual one.
“We see this recovery as being a slow, grinding one, more of
a U-shape than a sharp V shape,” says Colonial First State’s
Head of Investments Market Research, Stephen Halmarick.
“Markets have factored in a sharp recovery, but we don’t see
a quick return to the conditions of two years ago. We see slow
gradual growth with low returns. This isn’t a cyclical event
but a structural event. Investors will have to get used to lower
earnings and returns for the next five to ten years.”
Stephen believes sharemarkets will start to track sideways
over the next year, and interest rates will stay low as economic
growth will remain flat for the rest of the year. “But that’s a
pretty good outcome compared to everyone else,” he added.
The lessons we learn
The moral of this story is that it still has a few twists to come.
We should be guarded about forecasts of a sharp recovery. If
there are two factors we, as investors, can control is our attitude
to risk and goals. As your financial adviser, we will advise you
on the best way to reach those goals, with a strategy you are
comfortable with. As long as you stay focussed on your goals and
see risk and fluctuating returns as a natural part of the process,
the right long-term strategy will deliver the desired results.
The year that was
July 2008
February
•• Australian dollar ($A) reaches a peak of US98c
•• S&P/ASX 200 Index starts year at 5.215.3, declines 4.6%
for the month
•• Dow Jones starts year at 11,350; rose 0.3% for the month
•• Listed Property Trust Index (LPT) fall 5%
•• Australian Government 10-year bonds 6.22%
•• Australian Government announces $42 billion
stimulus package
•• US outlines a $US2 trillion ‘Financial Stability Plan’
•• S&P/ASX 200 Index falls 4.9%
•• Dow Jones falls 5.5%
•• Australian Government 10-year bonds 4.60%
August
March
•• S&P/ASX 200 Index rises 3.2%
•• Dow falls 1.5%
•• LPTs rises 10.3%
•• Australia GDP for December quarter declines 0.6%
•• Unemployment rises to 5.2%
•• US announces Public Private Investment Program
$US1 trillion to buy ‘toxic assets’
•• Dow Jones rises 7.7%
•• S&P/ASX 200 Index rises 7.1%
•• LPT is flat
September
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S&P/ASX 200 Index declines 10.4%
Dow Jones falls 6.0%
Reserve Bank of Australia (RBA) reduces rates 0.25% to 7.00%
LPT declines 5.7%
October
•• US Stabilisation Act passed. $700 billion to buy
‘troubled assets’
•• RBA reduces rates by 1%
•• $A falls to US79.02c
•• S&P/ASX 200 Index falls 12.7%
•• Dow falls 14.1%
November
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US announces another $800 billion rescue package
Barack Obama elected President
Citigroup granted $20 billion bail out
S&P/ASX 200 Index falls 6.9%
Dow Jones falls 5.3%
Australian Government 10-year bonds 4.60%
December
•• US is officially in recession
•• Australian Government announces a $10.4 billion
stimulus package
•• RBA cuts rates by 1%
•• S&P/ASX 200 Index falls 0.5%
•• Dow falls 0.6%
•• Australian Government 10-year bonds 3.99%
January 2009
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S&P/ASX 200 Index falls 4.9%
Dow Jones falls 8.8%
$A falls to US63.81c
LPT falls 9.6%
President Obama announces $800 billion stimulus package
April
•• G20 meeting announces increase in IMF funding and
spending of $US1.1 trillion
•• Inflation falls to 2.5%
•• Unemployment rises to 5.7%
•• S&P/ASX 200 Index rises 5.5%
•• Dow Jones rises 7.4%
•• LPT rise 6.1%
May
••
••
••
••
••
••
••
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Australian 2009–10 budget forecast a $58 billion deficit
Unemployment falls to 5.6%
$A rises to US80c
S&P/ASX 200 Index rises 1.0%
Stress test of US banks finds $US74.6 billion needed
Dow Jones rises 4.1%
LPT rises 3.8%
Australian Government 10-year bonds at 5.28%
June
•• Australian economy records growth of 0.4% for the March
quarter, better than international counterparts
•• Unemployment rises to 5.7%
•• S&P/ASX 200 Index finishes on 3,954, a 24.1% fall for the
financial year
•• Dow Jones finishes at 8.447, a 25.6% fall for the
financial year
•• LPT finishes with a 42.1% fall for the financial year
•• Australian dollar finishes at US80.75c
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Important information
This general advice has been prepared without taking into account your particular financial needs, circumstances or objectives, and is based on Financial Wisdom Limited’s
understanding of current law as at 3 July 2009 and its continuance unless stated otherwise. While every effort has been made to ensure the accuracy of the information, it is not
guaranteed. You should obtain professional advice before acting on the information contained in this publication.
Financial Wisdom advisers are Authorised Representatives of Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, a wholly owned but non-guaranteed subsidiary of
Commonwealth Bank of Australia ABN 48 123 123 124.