The Australian share market has experienced a strong rally over the past 12 months, although it must be said that this rally was off a low base.

So the question that all investors want to know - "Is the share market expensive now?"

One way of determining this is to consider the Equity Risk Premium.  Equity Risk Premium by definition is "The excess return that an individual stock or the overall stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of the equity market. The size of the premium will vary as the risk in a particular stock, or in the stock market as a whole, changes; high-risk investments are compensated with a higher premium."

Below is a chart that shows the history of the Equity Risk Premium in Australia and basically this shows that the higher the risk premium, the better value the market.  Or in other words when the graph is above the "average" line the market can be considered to offer better value compared to when the equity risk premium is below average.

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This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Published in Investment Advice
Monday, 18 March 2013 14:31

Investment Tips For Each Decade

Investment tips for each decade

Many opinion pieces and financial articles have been written with handy tips to help invest your money. An issue with many of these is that the people reading them are, in all likelihood, of different ages and at different stages of life.

With this in mind we’ve broken down each decade to help you understand some of the financial considerations.

20–29 year olds

Many people have just entered the workforce at this stage and most people will still be renting. While some people in their twenties have formed long term relationships many have not had children. For the majority, home ownership and families are still a thing of the future.

The major financial focus for this group is to eliminate debt that may have been accumulated while at university/college (HECS–HELP, credit card debt, student loans etc.), and to start to save for a deposit on a home.

30–39 year olds

By the time most people are in their thirties, they are in long term relationships and a lot have had children. Many people during this period have bought their first home and some would even be considering renovations.

The major financial focus during this stage is usually on reducing mortgages as much as possible.

People in this age bracket need to be careful not to over extend themselves financially, and aim to keep money available for emergencies that are more likely to occur than when they were renting and had no children.

Those without children or a mortgage, who are looking to get ahead at this stage may consider investing in the share market.

40–49 year olds

It may sound obvious but the financial position in this period will be largely determined by how much spending restraint has been shown during the previous decade. For disciplined savers there is a good chance of being able to upgrade to a bigger home at this stage of life.

In saying that, the forties can be difficult for couples who have children in their teens as they generally incur more costs at that age, especially if they attend private schools. Careful budgeting is required for people in this position.

Those that don’t have children and have enough money for their day to day expenses may start thinking about diverting more of their money into superannuation.

50–59 year olds

By this stage many people will start experiencing more sustained wealth creation due to fewer family costs. The reason for this is because most will have children at an age where they are becoming financially independent.

Generally salaries are also higher in this bracket. Putting more savings in superannuation is very common when people are in their fifties given the current tax incentives that come with it. This is also an opportunity for many to start their own individual business.

60 and beyond

For people past 60, the main financial focus is to invest savings to generate a retirement income and maximise the age pension.

In summary

Regardless of which stage you are at, it’s important to make a financial decision based on the assessment of the risks and opportunities that exist in your life. As you can see, these seem to change with each decade.

We can help you find the right investment opportunities for your individual situation and for each life stage.

This document has been prepared by Colonial First State Investments Limited. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.

Published in Investment Advice
Tuesday, 29 January 2013 12:15

Reflating the Japanese Economy

Key points:

  • While it is likely still has more to do,the Bank of Japan is on a path towards major policy reflation for the Japanese economy.
  • This is likely to see further downwards pressure on the yen and strong gains in Japanese shares.
  • It is also positive for the global economy as Japan will likely no longer be a drag on global growth going forward.
  • While Japanese monetary reflation adds to upwards pressure on the Australian dollar, a stronger Japan will be positive for Australia overall as it remains our second biggest export market.
  • Platinum International Fund has significant exposure to the Japanese share market.

Introduction

The announcement that the Bank of Japan (BoJ) is raising its inflation target to 2% and adopting open-ended quantitative easing is very positive.

Options for further fiscal stimulus in Japan are severely limited
by an already world beating budget deficit and public debt levels. Currently, the budget deficit is running around 10% of gross domestic product (GDP) and net public debt is around 135% of GDP compared to 73% in Europe and 84% in the US. Half-hearted monetary stimulus from the BoJ has played a major role in driving the deflationary malaise the Japanese economy has been in for the past two decades. So, apart from structural reform, it is really all up to monetary policy in Japan to pull the economy out of its long-term malaise.

The BoJ’s move reflects ongoing pressure from the new Japanese Government under Prime Minister (PM) Abe, which received a resounding mandate to reflate the economy at last December’s election. This is now resulting in aggressive action from the BoJ and highlights that Japanese economic policy is undergoing a dramatic turn for the better. Key to this change is PM Abe’s comment that the Japanese economy is not going to change “unless we display a firm commitment to escape deflation.”

While some quibble that the pressure from the new government has violated the BoJ’s independence I view this as entirely appropriate. Central bank independence should be conditional on the central bank achieving stable prices and thereby contributing to economic growth and full employment. However, the BoJ has failed in this regard overseeing years of chronic price deflation. As such, it is entirely appropriate that the Japanese Government intervene to refocus the BoJ on achieving an inflation objective.

More to do

The big news from the BoJ was its adoption of an official ‘target’ of 2% inflation agreed with the government. This is a far more substantive commitment than its previous ‘goal’ of 1% inflation.

Having boosted its monthly asset purchase program (basically buying government bonds and other assets using printed money) for 2013 to levels that matched the US Federal Reserve at its December meeting, it also announced the program would become open ended starting in 2014 with ¥13 trillion in asset purchases a month.

On the downside though, with no increase in the size of its 2013 program and the 2014 program focused on short-term bills and likely to be diluted by redemptions, the BoJ will probably still need to do more if it is to achieve its 2% inflation target.

However, the move by the BoJ should be seen as another step along the way to much more aggressive policy reflation. The first step was the big expansion of its quantitative easing program at its December meeting. This has now been followed by the adoption of a firm 2% inflation target. Further easing is likely once a new more dovish BoJ governor takes over in April and finds that he has little choice but to further ramp up quantitative easing if the agreed inflation target is to be met.

Global implications

The adoption of aggressive monetary reflation in Japan aimed at exiting deflation has a number of mostly positive implications globally:

  • TheJapanese yen is likely to fall another 10-20%,after the current short-term correction runs its course. This would take it to around ¥105 against the US dollar and to around ¥110 against the Australin dollar ( just surpassing its 2007 high of ¥107.8). Such a fall in the yen will be necessary if Japan is to achieve its 2% inflation target in the next few years and this in turn means that Japan will need to continue its open-ended quantitative easing for quite some time.
  •  Japanese shares are likely to perform well. A 30% or so gain is feasible this year. As can be seen in the next chart the relationship between value of the yen and the Japanese share market has been inverse over the last ten years, so a weaker yen will provide a big boost to Japanese shares. This largely occurs because a weaker yen provides a huge boost to Japanese exporters.

Japan Yen and sharemarket

  • A strongerJapanese economy helped by a weaker yen and an end to deflationary expectations.
  • Japan will no longer be a drag on global economic growth.
  • Easier monetary policies in Japan will add to ultra easy global monetary conditions.
  • Yen weakness will put more pressure on competitor countries, notably Korea and Taiwan, which may in turn put more pressure on their central banks to further ease policy too.
  • Aggressive easing from the BoJ adds further fuel to the global carry trade of borrowing cheap in Japan and investing in higher yielding currencies like the Australian dollar.While the immediate reaction to the BoJ’s announcement has been for Japanese shares to fall a bit and the yen to rise this looks like a classic example of short-term profit taking after the strong moves in both markets over the past few months. As the pace of BoJ easing continues and probably steps up the rising trend in Japanese shares and falling trend in the yen will likely resume.

Concluding comments

Japan takes 19% of Australia’s exports and is our second largest trading partner, so notwithstanding the risk of more upwards pressure on the Australian dollar, an exit from deflation and stronger growth in Japan will be positive news for Australia.

This year has already seen a number of positive developments for the global economy, including: the avoidance of the fiscal cliff in the US; indications that the US debt ceiling will be extended; the relaxation of the Basel bank liquidity requirements; and solid data releases from the US and China. Aggressive Japanese policy reflation just adds to this list. As such it’s little wonder that share markets have started the year on a strong note.

Investors in Platinum International Fund have significant exposure to the Japanese share market and are therefore potential beneficiaries of this course of action from the Bank of Japan.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Published in Investment Advice

We recently celebrated the 5th anniversary of the high point for the Australian share market that occurred in November 2007.  The value of the market remains 30-40% below this peak.

History tends to repeat itself so lets compare the last 5 years to other large market downturns in history.

The chart below shows the value of the Australian share market many years after a large drop such as the 2008 drop.  The blue line is the journey investors have witnessed over the last 5 years and plots that journey against other times in history when the market fell heavily.

The question on most investors lips is when will the market recover to new highs?

The chart above shows that it took around 4 years for the market to reach new highs after the 1980 downturn (purple line) and around 5 years after the great 1929 crash (green line). This makes the current downturn one of the most severe in history.

The 1973 and 1987 downturns took 6 - 7 years to recover the previous high.  From the current level the Australian share market would need to rise by around 50% to move back to the previous high.

Bear markets do end and can move quickly when they do.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.


Published in Investment Advice
Is the glass half empty or half full? The pessimist would pick half empty, while the optimist  would choose half full.

Investors would be excused for failing to realise that share markets over the past 12 months have returned over 10%.  Investor sentiment is still negative as can be seen in the equity risk premium chart below.

Equity risk premium is defined as "The excess return that an individual stock or the overall stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of the equity market. The size of the premium will vary as the risk in a particular stock, or in the stock market as a whole, changes; high-risk investments are compensated with a higher premium" (definition sourced from Investopedia)

Currently investors require a higher return from the share market due to risks, or perceived  risks, before they will commit money - which explains a high equity risk premium.  You will notice that the equity risk premium is at a level not seen since early 2009 during the peak of the GFC.  Once global policy makers took assertive action at that time, the share market rallied strongly.

What catches our eye is that share markets have performed strongly over the past 12 months despite enormous pessimism.  The ASX 200 for example at the time of writing is trading at 12 month highs and yet investor sentiment toward the share market is trading at multi decade lows as can be seen from the chart below which was sourced from Westpac Economics.

Historically, strong share market rallies have followed periods of extreme pessimism.

One of Warren Buffett's famous quotes is "be greedy when others are fearful". (and be fearful when others are greedy)

Those sitting on the sidelines must ask themselves "Is it different this time?"

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.


Published in Investment Advice