Mercy Super - Always for you

Global financial markets are currently displaying renewed volatility that has caused global investors to once again seek the relative safety of less risky assets - mainly the bonds markets of the largest economies and the US dollar.

 

By contrast, global share markets have been very weak, and commodity-related currencies such as the Australian dollar have fallen sharply against most other currencies.  Commodity prices too have fallen.

 

This current bout of volatility began around a month ago as investors began to question the ability of the Greek, and other peripheral European governments to chart a path toward correcting their very large budget deficits.  In response to the increasing pressure that investors placed on Greek, Spanish, and other European fixed interest markets (which drove yields on debt in these markets sharply higher), the International Monetary Fund (IMF) and the European Commission (EC) announced a package of significant loan and guarantee measures totaling Euro 750 billion (AUD 1.1 trillion) in early May.  Already disbursements from this package have been forthcoming for Greece.  While this package appeased markets for a day, fears have now broadened to include a widespread investor focus on the near term financing requirements of a number of European countries and, more broadly, on the measures that most governments around the world will have to implement to exit from the very significant budget deficits that have resulted from the stimulus measures that have been put in place in response to the global financial crisis.

 

As well as Greece, a number of other governments have recently announced the types of taxing and expenditure cutting measures that they intend to implement to begin the task of moving budget deficits toward balance again by tightening fiscal (budget) policy.  In Australia, the poorly understood Resource Super Profits Tax (RSPT) has also had the effect of creating uncertainty in investors' minds.  The increased investor focus on the likely depressing impact on economic growth of tighter fiscal policy has caused investors to reevaluate their expectations for potential growth and earnings.

 

The impact on Australian financial markets has been severe.  As well as the influence of global market weakness, the uncertainty regarding the RSPT and the recent signs that the increase in interest rates by the Reserve Bank might be starting to impact spending have combined to drive the Australian dollar and the domestic equity market lower.  Expectations regarding the likely path of official interest rate tightening by the RBA have softened a little as a result.

 

Volatile times such as this are when it is important to have a well diversified portfolio across both Australian and international assets, and growth-orientated and defensively-orientated assets.  Well diversified portfolios have displayed their value over the past year with returns generated by strong performance by both growth-orientated and defensively-orientated assets.  A mix between listed and unlisted assets is also important at times like these.  Relative to most other countries in the world, Australia's fundamentals are vastly superior, particularly regarding the relatively small size of our Federal budget deficit and government debt levels.  Additionally, Australia still retains flexibility regarding monetary and fiscal measures to respond to any potential renewed downturn in global growth expectations.

 

This report was prepared by Frontier Investment Consulting.