Market movements - March 2008

The investment market update

Financial markets have continued their slide in recent weeks, with the Australian sharemarket retreating almost 22 per cent from the peak set in November 2007 or 17 per cent on the calendar year to date. Global markets have also been savaged, with the US Dow Jones Industrial Average down around 5 per cent so far in 2008, and Japan's Nikkei 225 down 19 per cent.

Credit markets remain tight globally, and the price of money has risen dramatically. This tightening in credit markets is evidenced most noticeably by the Australian banks increasing their loan rates above the Reserve Bank of Australia (RBA) official cash rate increases. Australian banks have experienced an increase in the cost of obtaining funds and have passed some of these costs onto their borrowing customers.

With markets posting negative returns in recent months, and anxiety abounding, many people may feel tempted to move their assets over to the relative stability of cash. Markets have been volatile (and mostly in the downward direction of late) and there has been little positive news to cheer.

But the silver lining to all this is that it has at least given the RBA pause in its tightening of monetary policy. This may suggest that interest rates are at, or nearing, their peak.

Consumer confidence falls

Lending some weight to this view are three publications released this month - the Westpac-Melbourne Institute of Consumer Sentiment, the National Australia Bank (NAB) Monthly Business Survey, and the Sensis Consumer Report - which all revealed a sharp drop in confidence. The Westpac-Melbourne survey's quarterly decline of 21.2 per cent was the largest three-month fall since the index was first measured in 1975, and takes the measure of consumer confidence to the lowest levels since 1993.

The NAB Business Survey also indicated that business confidence is below long-run average levels and declining, and business conditions are also trending downwards (albeit from relatively healthy levels).

Finally, the Sensis Consumer Report, an indication of consumer confidence and expectations, fell sharply with only a net balance of 44 per cent of Australians surveyed reporting confidence in their financial prospects for the year ahead. This represents a 17 per cent decline from the previous quarter (and the largest since the survey commenced in May 2004), which reported a balance of 61 per cent of Australians 'feeling confident'.

It's worth highlighting that this is more or less the effect that the RBA has been aiming for with its rate rises. That is, a slowing of consumer spending, hopefully without stalling economic growth. Whether the RBA's most recent March rate rise to 7.25 per cent ultimately proves to be too much is a good question. Some economists are suggesting that a reversal of interest rates could occur as early as 2009. If so, this may provide some much needed reassurance to local markets, even during what may be a fundamentally weaker economic environment than exists today.

A bear market

What you should keep in mind is that Australia's investment markets have changed. We have come through five years of strong absolute returns and entered into what has been described as a bear market cycle.

The key near-term issues continue to be:

• the risk of a US recession;
• further fallout on Australian corporates from worsening credit conditions;
• domestic inflationary pressures; and
• the direction of future interest rates.

The future is filled with uncertainties. Rather than trying to anticipate what could happen, developing a suitably diversified strategy and being disciplined should help position you to cope with most market conditions. Time in the market is often more important than timing when to enter and exit the market.

Plum recommends that if you feel uncomfortable with your current asset allocation or level of diversification, you should speak to a financial planner who can advise you on how best to invest your portfolio. He or she may also be able to give guidance in relation to how current overseas markets may affect any other investments you have.

Please keep visiting the website for further updates on the investment markets.

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