Twenty Ten, A Market Overview

“May you (NOT) live in interesting times”
to rework a famous Chinese curse, may be the call from investors in 2010.

Investors mettle has well and truly being tested over the past two years as markets have experienced dramatic movements during, and in the wake of, the Global Financial Crisis.

So where to now for investors, what does 2010 hold?

Unfortunately we do not have a crystal ball, but we can use the knowledge gained from this tumultuous period to provide us with some clues as to what we may expect.

Global Economy

A general consensus is forming that the world economy has now passed the worst of the Global Financial Crisis, and a return to stronger economic growth is expected. This was confirmed by the International Monetary Fund in January when it revised the  projection for world economic growth upwards  to 3.9% for 2010, and 4.3% in 2011. This is a remarkable turnaround from just four months ago when they were forecasting 0.8% for 2010 and 0.1% in 2011.

However, they also caution that the sustainability of the recovery is heavily dependent on a number of challenges including the successful unwinding of government support, improvement in the state of the financial sector and the ability of emerging economies (such as India and China) to reliably lead world economic growth.

Meeting these challenges will not be easy, nor will it occur quickly, and therefore we should expect periods of uncertainty and volatility as world economic growth recovers.

What does this mean in plain English? While the IMF see a highly positive trend, markets will still be volatile – don’t expect a smooth path going steadily upward.

Australian Economy

Compared to many other developed economies, the Australian economy has remained relatively unscathed by the worst of the economic crisis. Although we did experience an initial jump in the unemployment rate, an earlier than expected fall occurred in December to 5.5%.

The Australian economy should therefore be well positioned to take advantage of the expected turnaround in global growth. In particular the continuing demand from the emerging economies for our broad based commodities should place the Australian economy in a strong position.

Asset Classes Impact

Asset classes have generally responded well to the improving economic conditions.

Equity markets both here and abroad have rebounded since the market bottomed in March 2009. But we have also witnessed, during this time, that the markets can easily be spooked by negative news.

Therefore although we are optimistic on a sustained recovery in equity markets, we believe that investors need to be aware that there will be periods when negative news may detract from performance.    

With this in mind we have compiled the following tips for you to consider as we head into 2010. We suggest that  partnering with a skilled financial adviser will be the most effective way of implementing these tips.     

Top tips for investing in 2010:

1. Invest with your head; not your heart – investing can be an emotional experience and rash decisions based on emotions like fear, generally result in losses. We believe that 2010 will be dominated by a range of macro themes that cause spikes in asset return volatility against the back drop of an improving economy and generally positive market outcomes. This means it will be just as important to be patient in 2010 as it was in 2009 – perhaps even more so. Investing with your head means remembering that buying under valued stocks is they way to make money in the long run. The ‘herd’ will buy when prices rise and therefore will make smaller gains.
   
2. Stick to your guns – establish a long-term investment plan and stick to it! It’s difficult to reap the rewards if you’re continually changing your investment focus by chasing last year’s best performing asset class. 2010 is unlikely to offer the same distinct opportunities as 2009, yet a valuable lesson can be observed in the importance of discipline and process in investment decision making. Successful investors were distinguished by their rebalancing discipline and the use of rigorous decision making processes to take advantage of opportunities.
   
3. Branch out – Make sure your investment is adequately diversified across a range of areas. Asia’s strong sharemarket rebound from the global financial crisis and robust economic performance is attracting a lot of investor interest. Think about how you can best take advantage of opportunities in emerging markets such as Asia. But remember, Asia is a big region – speak to your adviser about specific regional opportunities as well.
   
4. Diversification remains the key – We expect that a well-diversified portfolio should generate a reasonable, but not spectacular, return in 2010. Most asset classes appear priced for moderate economic growth, which seems the most likely outcome. As the global economy transitions from initial recovery to still uncertain longer term trend, there is plenty of scope for renewed volatility as expectations shift. Investors will be well served by heeding the lessons of the past two years.

Remember, it’s about the time in, and not the timing, which is key to making a long term investment strategy work for you. We understand your personal financial needs, so contact us now if you would like to discuss these strategies in line with your objectives.