Maddern Perspectives

Afternoon Maddern Private Clients,

With recent reports on falling markets, it’s not hard to imagine that people could be concerned about their investments, but it has been interesting that virtually all MPW Clients have remained calm and I would estimate that 70% of our Clients have been buying to ‘average in’ on their Investments.

It is normal and appropriate for clients to ask whether this volatility is a precursor to another global financial crisis, or wondering how long we can expect market uncertainty to last, or interestingly as 70% of MPW Clients have done is to ask if it’s a good time to buy investments cheaply!

Getting a balanced view:

Globally, the appetite investors have for risk has significantly fallen since late April, which has seen global share markets fall by around 18% (at 9th August ‘11).

For the most part, this has been a reaction to the building concern for the slow but sure spread of the European debt crisis and the recent US debt situation.

In both cases, the delay in action by policy makers has taken its toll. You will have seen in the news the political football that saw President Obama’s debt deal agreed on the last possible day.

Last week was a big week both locally and overseas, which makes now a good time to update you on the current outlook and explain what this means for your investments.

Global politics and the share market

In Europe the current debt problems aren’t going to just go away. We will continue to hear reports of potential debt defaults, and of potential problems in the European banking system.

While we all hope that the political leadership of countries such as Spain, Greece, Ireland, Germany and France will soon take the kind of steps needed to prevent further Europe-wide economic and financial issues, there are political hurdles in the way, e.g. some of the current governments are facing upcoming elections, Spain in November this year, followed by presidential elections in France next year. Many of the steps that need to be taken are going to be politically unpopular, and it is hard to see many of Europe’s politicians wanting to face the polls after taking those steps. The IMF, and World opinion may however force austerity measures, e.g. Berlusconi in Italy promises to have a budget surplus in two years. France and Germany will also exert pressure on countries to balance budgets.

In the US, Standard and Poor’s, gave the first ever downgrade of the US Treasury’s debt. Despite this, US Treasury bonds are still very much in demand. In times of equity market turmoil, it is clear US Treasuries are still a key safe haven for investors.

What this means for your investments:

In times like this active management of your investments is crucial to delivering good strong medium to long-term returns. Such market volatility and individual share volatility, provides a great backdrop for Maddern Private Wealth to pick up shares at very attractive prices relative to their medium-term growth opportunities.

We have been buying for circa 70% of our clients over the past two weeks. Another comforting factor that we monitor is the unprecedented buying of shares by company directors, particularly in the US.

In the last week alone 60 senior managers bought shares in over 50 Dow Jones companies; companies like Morgan Stanley, General Motors, Chesapeake Energy and Dow Corning. So, while the level of economic activity has slowed down particularly in western economies, is perhaps not as dire as media reports have suggested.

Ironically, in these times, high quality equities may actually prove to be more of a safe haven in a world dominated by government debt concerns. Many companies around the world are in a very strong financial position, with historically very low levels of debt, and able to invest in and grow their businesses.

Issues to consider:

While some government debt is large, e.g. Japan, US, Greece, Italy, etc there are companies around the world faring much better. In the US alone, there’s $1.5 trillion in cash sitting on company balance sheets.

These companies are less concerned about cutting costs and more focussed on increasing their capital expenditure, just today Google have acquired Motorola’s mobile business.

And, pleasingly, we have learned much from the GFC in 2008, e.g. banks are generally stronger, more transparent and the market has more certainty about where the banks are invested.

Because of this, I think there are some great opportunities for those with a medium to long-term time horizon.

What this means for your investments:

The Australian Federal Government continues to maintain its AAA credit rating and, although the economy has softened in 2011, we do have the benefit of strong export partners such as China and India.

However, we aren’t insulated from the global uncertainty and that’s reflected in large falls in the Australian share market too.

How your money is being managed is even more important during times of global risk. Because of this, Maddern Financial Advisers Pty now have the following methods of Client communications:

1. Twitter – https://twitter.com/#!/DrDJMaddern
2. Blogs – http://www.maddernfinancial.com.au/perspectives – go to Maddern Blog
3. Maddern Private Wealth – Direct Portfolio (MPW-DP)
4. Regular reviews

Summary:

In summary, we remain confident in the share market for many of the points I’ve outlined in this email. I have also written an interesting Blog at: http://www.maddernfinancial.com.au/perspectives – Maddern Blog that you may find interesting. I make the points that converting to cash is not the answer during periods of uncertainty, and that ‘time in market’ is the key.

With share markets moving up and down, many people and a few of our Clients wonder just how safe their super/investments are.

Where you are in your life, will shape what you do with your Investments, especially in times like these, e.g. someone who is retired is in a very different position compared to someone who is still employed and contributing to their super.

If you are still contributing to your super – then typically most people take a long Investment time frame and are currently in a strong position to use the volatility in markets to their advantage. This is due in large part because they do not have to draw on their superannuation for a few years to come, and current market circumstances are providing many opportunities to buy while values are low.

Ultimately, Clients will see their value grow because, while we are experiencing some pain from being in the market now, history tells us that in the longer term, the share market has headed in one direction – up. It just takes time.

A way of taking advantage of the short term market volatility is to take out the guesswork. It is very hard, and many experts say impossible, to predict market movements with accuracy, you can use dollar cost averaging. This is where you invest a set amount at regular intervals. This is essentially what you are doing when you regularly contribute to super. By regularly buying units while the price falls, the Investor has been able to buy more units.

If you are close to, or in retirement – in markets like this, the hardest hit people are those who are either approaching retirement, or in retirement. While the market has shown that it always has recovered over time, the question remains – will you have enough time to benefit from the inevitable bounce back?

The key message here is if you can afford the time to stay in the market you will eventually benefit from the bounce back, but you will have to be patient. From a MPW perspective, we would have the vast majority of our retired Clients in conservative settings inline with the MPW lifestages risk profile. We take special care of our retired Private Clients, so hopefully this critical ‘time in market’ factor is less of a concern.

The real cost of cash – during uncertain times like this cash can appear, on the surface as a safe haven. If a client is thinking of moving some of their Investment to lower risk Investments, like cash, then here are some points to consider before you make your final decision:

1. Newton’s law of motion – every action has an equal and opposite reaction – this law also applies to share markets. After each downturn, the market eventually bounces back.
2. So, if a Client places some of their portfolio into cash, when the share market inevitably recovers only the portion of your portfolio in the growth assets (shares, in this case) will benefit.
3. When markets fall, the RBA often cuts interest rates to encourage investment in riskier assets.

Advice is always available to our Private Clients.

LAST Wednesday, BHP Billiton announced a profit of $US10.7 billion ($10.6bn) for the half year to December 31.
There can be no argument this is a tremendous result for all shareholders.

Having fielded many questions from investors who did not see the negative signs for their investments prior to collapse during the global financial crisis, BHP’s recent performance and balance sheet clearly provide significant comfort that this company is in an extremely strong position courtesy of the commodities boom.

BHP’s results presentation released on Wednesday is testament to its strength, indicating net gearing levels below 10 per cent, a compound annual growth rate in cash dividends over the past 10 years of 23 per cent and net capital returned to shareholders over the past five years at 29 per cent.

Dr. Dennis J. Maddern will use this area to project his voice about finance, private wealth, current news and affairs, as well as a personal take on everything within accounting, seminars, topics, personalities and more.

Stay tuned!