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Investment commentary
What do the recent interest rate cuts mean to investors?
18 Dec 2008
With significant declines in consumer demand, economic growth slowing to a trickle and unemployment expected to rise, this latest cut (along with previous cuts totalling 2% since September 2008), is an attempt to stimulate the Australian economy and avoid a recession, or at least, ensure any economic downturn is short lived. Despite similar massive stimulatory programmes globally, the USA, the UK, most of Europe and Japan are now officially in recession, having experienced two consecutive quarters of negative growth.
Australia’s GDP grew just 0.1% seasonally adjusted in the September quarter, so although we remain in “positive” territory many feel the economy will remain weak well into the next year. The December quarter takes on huge significance as we await the impact of the Christmas “spend” on economic growth.
The RBA continues to monitor the situation closely and more interest rate cuts in the New Year appear to be on the agenda. This, combined with the government’s $10.4 billion handouts package (including one-off payments this week worth $8.7 billion to pensioners, carers and lower income families), the fall in fuel prices and the depreciation of the currency will help to provide a much needed boost to the economy. The extent to which these factors “cushion” an economic downturn remains to be seen but with a fundamentally robust economy, and plenty of room for the RBA and Government to take further action if required, it is to be hoped that the Australian economy does not fall into a deep recession, a possibility that remains a risk for some of the aforementioned countries.
So, where does that leave equity markets? Currently the markets are anticipating a severe global economic downturn and that is being reflected in significant volatility and price declines that analysts agree is likely to last for some time. The volatility relates primarily to uncertainties of how prolonged and deep this downturn will be and how it will affect company earnings, ie. profitability. Markets however are prone to overreact both on the upside and the downside. BHP has recovered now (December 2008) to be trading at about $30 after hitting a low of $20 earlier this year. In May 2008 BHP was traded at a high of $50. Is it really worth 40% less now than in May this year? In truth, it is difficult to be definitive in any conclusion but we can probably say that $50 was too high and $20 was too low in valuing the net worth of BHP. The conclusion we can reach is that investor fear can temporarily overwhelm rational analysis. The key word is ‘temporarily’.
When investing with a long-term perspective (like super funds) the focus is on the true value of companies. This means relying on the available analysis, monitoring business trends and using this information to make decisions about which assets to buy or sell. The economy will recover. At some point markets will reflect this and we will have greater confidence that prices actually reflect the net worth of the underlying asset. It must be remembered however that it is notoriously difficult to pick the timing of any market recovery.
In the long run success rarely comes through timing the market – rather, it is time in the market that counts.
Greg Nolan, Manager – Investments, CareSuper
