Roller-coaster ride as stocks fall
WHEN the world was scheduled for demolition to make way for the hyperspatial express route in the wonderful Hitch-hikers Guide to the Galaxy, Arthur Dent was told: “Don’t panic”.
Those two words of advice are pertinent today as households’ finances face demolition after the Australian stockmarket lost about $27 billion within the opening minutes of trade yesterday.
Yet while Douglas Adam’s protagonist was told survival depended on wrapping his head in a wet blanket, it’s certainly not the best course of action for today’s families, self-funded retirees and investors.
The latest wave of fear to grip stockmarkets and central banks across the world was sparked by Friday night’s credit downgrading of the United States, the world’s biggest economy.
It didn’t take long for headlines to appear predicting the Global Financial Crisis Mark II.
And yet while it is true the global importance of the US economy gave rise to the adage “when America sneezes the world catches a cold”, it is not necessarily true in terms of the Australian economy.
The downgrading of the US’s credit rating is certainly a history-making event, but the local implications will vary depending on whether you are a home-owner (possibly good news), a self-funded retiree (not good news) or a long-term investor (opportunities abound).
Jobs and the economy
As Treasurer Wayne Swan has told anyone who will listen over the past few days, Australia is in a very lucky position.
Our economy is much closer tied to that of the booming Asian economies and their insatiable appetite for our commodities.
And with unemployment down around 5% compared to near double that in the US, workers here have little to fear in the immediate future. However there is a growing concern the Chinese economy in particular, that underpins the smaller Asian tigers, is showing signs of over-heating.
This means their interest-rate setting central bank may be forced to raise interest rates to dampen demand, with serious implications for Australia.
“Our economy is very much linked to China so if China has a hiccup our economy will suffer,” said Lismore-based Retire Invest financial adviser and BetterBusiness columnist Rick Rutten. If that occurs, he adds, the Reserve Bank may be forced to cut rates, which will be good news for those paying off mortgages.
It may well prove Westpac economist Bill Evans has the best crystal ball in the business.
He was the first economist to break ranks to predict interest rate cuts totalling one percentage point over the next 18 months.
He said this could start happening as soon as December as a result of a slump in consumer confidence, poor retail sales and global market uncertainty due to the US and European debt problems.
Others are now warming to Mr Evans’s view with CommSec’s chief economist Craig James among them.
While not yet predicting a rate cut, he reckons the RBA is more likely to stay on the sidelines than raise rates.
However the money market, which tracks expert sentiment, is now pricing in a 125 basis point cut over the next year.
This will cheer many struggling households, but not those on fixed incomes like self-funded retirees.
Retirees, particularly self-funded retirees, hold large amounts of their superannuation in cash.
While this is a lot less volatile than shares, it does mean that when interest rates fall, so does their return, said Rutten.
“In the current climate the key is as much diversification in your investments as possible,” he said.
“But you must always meet the sleep test, which means if you are concerned about sharemarket volatility and you feel uncomfortable about it you should reassess your portfolio, but that can also come at a cost of realising losses.”
The market extended its Friday losses, down another 3% yesterday bringing the total fall from its December 2007 peak to 40%. Yet for long-term investors, it presents an ideal opportunity to buy quality stocks, said Rutten.
“There are some real opportunities to buy good quality companies at very reasonable prices, unless you believe the sky is going to fall in, which I certainly don’t,” he said.
Rutten reckons it’s all about confidence.
“The companies that are listed on the stock exchange haven’t changed over the last few days even though we have seen their share prices fall.
“The other thing to remember is that for every sale there is a purchase. Someone is buying, so there are just as many people thinking the world economy as a whole will recover over the time.”
There’s no two ways about it – super isn’t that super at the moment. The stockmarket rout has wiped an estimated $30 billion from retirement nest eggs over the past week.
However Australian Super chief executive Ian Silk is urging people to keep the faith, noting super has notched up returns of about $120 billion over the past year.