Investment Market Volatility (in Brief)

Volatility in Global Investment Markets continued today and I suspect this will be well reported over the coming days. You may recall my recent article regarding the Greek Debt Crisis and my remarks to expect these periods of more extreme price volatility. I continue to see these lower valuations as opportunity and do not consider they will present any material loss to a portfolio of quality assets.

In Short

This is not another Global Financial Crisis.

Despite a sluggish economy Australian Business is in pretty good shape and reporting strong earnings, vastly improved balance sheets and lower gearing levels.  Australian Shares look compellingly attractive at somewhere in the order of a 10% discount to fair value. As an example, Australian banks are now trading on a yield of 6.5% and offer an attractive return to that of cash and fixed interest yields that sit between 2% – 2.75%. There is no real catalyst for an upward movement in interest rates and this should be supportive of the share and property markets.

Chinese economic growth is not imploding. Their share market has corrected and this was mostly fuelled by optimistic valuations and high levels of gearing predominantly through margin loans. As China watchers remain focused on peaking steel production and slowing property and infrastructure markets the composition of the Chinese economy changes, with the future driver being the rise of the consumer, an emerging middle class China that currently represents 50% of China’s urban population. Chinese authorities have plenty of stimulatory arsenals to unleash if required as we have recently seen with the devaluing of the Yuan and there is plenty of fat to cut with interest rates.

The U.S. economy continues to gain momentum in the right direction (albeit very slowly). Their share market has shed some coin and probably rightly so as valuations there were looking stretched relative to earnings. Some months ago Chair of the Federal Open Market Committee, Janet Yellen, said just that. This was an anticipated correction in the U.S. to which we have little to no direct exposure.

Future Earnings

The key to earnings is not daily pricing rather it remains the strength of dividends from shares, rent from property and interest from cash and fixed interest securities. We have a good mix of quality investment across these asset classes that I believe will stand up very well against this short period of speculative pricing. Now is the time to maintain investment principles, seek reasonable risk adjusted yield and allow the speculators to transfer their wealth to you.

Regards Heath