The impact of world wide recession appears to have finally hit Australia…
Large scale cutbacks and job losses are now daily news. Job advertisements have fallen as dramatically as our official interest rates. While not yet “official”, we are now in recession. So, how deep and how long?
Economists around the world are reflecting on a study by Reinhart and Rogoff (“The Aftermath of Financial Crises”) of the impact of 14 severe financial crises in recent history (eg Spain 1970’s, Norway 1987, Finland, Japan and Sweden in the early 1990’s). Their findings below showing cumulative change (%) and duration are sobering.
GDP PER PERSON –9.3%, 1.9 years
UNEMPLOYMENT +70.0%, 4.8 years
EQUITY (SHARE) PRICES –56.0%, 3.4 years
HOUSE PRICES –36.0%, 5.0 years
It can be seen that the economy remained flat for nearly two years. For us that would mean that the economic downturn would not end until December 2010. Until then, businesses will further tighten expenditure, defer investment and repay debt.
Interestingly, long after the economy recovers, unemployment hits its peak. In fact, it has taken nearly five years before employment reversed its trend. However, those with jobs will not see a substantial reduction in lifestyle as interest rates and prices will remain low.
The fall in equity prices has probably already occurred and prices should remain flat until investors realise that the worst is behind them. We anticipate that this shift in attitude could occur prior to the traditional 3.4 years as yields on other forms of investment remain low.
Interestingly, the data also suggests that both domestic and commercial property may have further to fall and it’s trough may be fairly protracted.
Against this potentially dismal backdrop, there remains a challenge to deliver meaningful investment returns. It will be through a long term focus and an associated strategy for asset and sector allocations and careful individual investment selection that will ultimately achieve that goal.
Specifically, the following approach:
- Set a long term asset allocation target for equities (Australia and internationally).
- The target is where the portfolio should ideally be in December 2010.
- Identify the desired selection of listed companies which are financially robust, well managed and whose activities are transparent and well understood.
- Avoid those specific investments where the full effect of the financial crisis is yet to be understood (this currently includes banks).
- Employ a staggered investment program whereby each quarter we incrementally invest in these listed companies, moving a little closer to our asset allocation target.
- In the short run, we expect price volatility to continue. This will obviously affect the short term value of these investments, however we are long term investors.
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