Investment Update September 2015
The months of August and September have been difficult periods for investors. Much of the volatility is due to concerns regarding the growth prospects for China.
As you are aware China as the worlds’ second largest economy has a significant impact on the world economy generally but an even greater impact on the Australian economy. The bulk of our exports are commodities and the price of commodities has dropped significantly over the last twelve months. This is what has led to a significant drop in the value of the Australian dollar over the last twelve months.
While there is no doubt the Chinese economy has slowed the long term growth prospects for China remain strong. China is also transitioning from a largely industrial economy focused on the production of low cost products to a mature service based economy.
The other factor impacting share markets has been the ongoing guessing game about when the United States Federal Reserve will raise interest rates.
Despite this volatility client investments have in the main performed well above the market benchmark:
There are threemain reasons for this outperformance:
An exposure to international shares on a currency unhedged basis.
We have held the view that the Australian dollar is overvalued for some time. As the Australian dollar has fallen against overseas currencies this has protected the value of your investments held in overseas currencies, primarily the $US.
Minimal exposure if any to resource based companies and their suppliers.
During the resources boom we were told that it’s different this time. This boom in commodity prices will go on forever. We did not believe that and it wasn’t different as commodity prices have fallen significantly. Mining companies are largely dictated to by commodity prices which are outside their control. As noted the retraction in commodity prices is primarily what has led to a sharp fall in the value of the Australian dollar.
Not taking on too much investment risk
Diversification is an old adage but it’s true. We do try to time investment market performance but it’s very difficult. Hence it’s important to be diversified. Some investments actually go up when share markets decline. Government bonds increase in value when share markets drop due to the security offered. When worldwide share markets drop the Australian dollar generally drops as investors like to hold the larger currencies such as the $US.
Where is the market positioned at the moment?
We believe the Australian share market represents good buying on a medium term basis.
The reasons for this are as follows:
The average income return or dividend yield on the ASX 200 which is the biggest two hundred stocks is now 5% per annum before any tax credit. Further the ratio of the average company’s share price to its expected earnings is under 14 times which is historically a level at which share markets become attractive.
So what does all this mean?
Mathematical statistics and measurements are only relevant to the rational investor. The irrational investor will sell an investment because they fear it will drop further. And in the short term they might be right. However over time fundamental values of investments do matter and that is why we believe long term investors should have a risk profile appropriate to their individual requirements.
John Ross Ethos Financial 25.09.15