Posted by andyfvp on Aug 4th, 2008

I recently received my Colonial first state superannuation half yearly statement and it showed the value of my portfolio is down almost 15% from January 2008 to July 1st 2008. Ouch. What was more annoying was the $500 or so in fees charged! Unfortunately there is little I can do about it, other than change fund managers. However given how bad markets have been this year I don’t think switching now would make much of a difference. Here is what they had to say for justifying the poor results. Provides a good recap of events to date, but doesn’t sound like a very optimistic or convincing outlook going forward. I will definitely be taking the time to review my superannuation investment strategy and allocation going forward. Have you?
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Your June statement and your investment performance

Since January of this year share markets have fallen dramatically. You may be disappointed by the current value of your investment and this is understandable, however it may reassure you that over the long term the general trend of share markets to date has been up and many investors would have received some healthy returns over the last five years. Over the past 20 years to May 2008 the Australian share market has returned 10.99% pa1 and the property market has returned 10.32% pa2. This long time period includes many significant events which severely impacted the market at the time, however those who had the courage to stay invested through the inevitable downturns have been rewarded for their patience.

With markets considerably lower than their previous highs, this may not be the most ideal time to make changes to your investment strategy. Although it may be tempting to switch your investment to something that has delivered better returns over the last 12 months, chasing last year’s winner may not be a sensible strategy.

What is happening in the share markets?
From mid-March to mid-May, share markets began to recover, largely due to a series of aggressive interest rate cuts in the US and cash injections into financial markets by central banks around the world. Strong commodity prices, particularly coal and iron ore, and takeover activity also helped the markets to recover. Bidders believed that the takeover premiums included in the current prices offered long-term value. This type of activity was building confidence and suggested that these companies were optimistic about the future.

From mid-May to the end of June share markets took another turn for the worse. Higher oil prices, higher interest rates and concern over slowing economic growth saw investor nervousness return and share markets fall. Although higher interest rates are slowing activity in Australia the economy is still growing and the resources boom is not over. This should be positive news for the Australian share markets over the remainder of 2008 once investor confidence returns.

Have we seen the bottom of the market?
The immediate crisis appears to be behind us, although volatility does remain. However the problems we still face relate to the pace of economic growth in the US and Australia. If higher interest rates in Australia slow the economy more than expected, companies may issue further profit downgrades or profit warnings. Of particular interest will be the profits of banks. Banks make up a large proportion (around 20%) of the share market and therefore have a significant impact on the performance of the Australian share market. Banks have come under short-term stress due to rising interest rates. Banks have had to pay significantly more for the funds they borrow in global capital markets and this will affect the demand for loans by their customers for at least the remainder of 2008. Over the longer term it is unlikely that the banking sector will dominate the market as much as they have done over the previous decade or so.

The share market should recover over time as US sub-prime and other issues are worked through and focus is placed back on the future earnings capacity of companies.

Does the share market still offer good investment opportunities?
Market sentiment can lead to unpredictable and volatile investment returns. What is important is the need to focus on the underlying fundamentals of the Australian share market. Despite the gloom in the markets we would do well to remember that parts of the Australian economy are still booming. The resources sector has seen the prices of coal and iron ore rise significantly. Share prices in the resources sector have recovered most of the ground lost in the early months of 2008 and although we are still in drought the rains over much of Australia should assist rural incomes and rural exports.

While the market will always have ups and downs Australia remains well placed to grow over the next five to ten years. This means that opportunities are likely to be ahead for those who invest in the share market.

What might the future hold for the rest of 2008?
Current market sentiment is that the outlook for the rest of 2008 is relatively positive for a number of reasons, although it is likely we will continue to see some volatility over the short to medium term. In the medium term, positive drivers such as the resources boom and the Reserve Bank of Australia’s commitment to keeping inflation on an even keel should help company profits and support the Australian share market.

On the global front, the global economy is expected to slow, at least for the remainder of 2008, from its fast pace of growth over the last three years. Developing economies such as China continue to report strong economic growth that is not as dependent on the US economy growing.