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Investment wrap-up of 2009

January 2010

After a turbulent 2008, the beginning of 2009 saw much of the same uncertainty. Markets continued to tumble and economic conditions continued to deteriorate as we priced in a world on the edge of a financial abyss.

A lack of confidence in the markets saw investors pull out of equities in droves with the markets bottoming out in early March. Wall Street’s key indicator the Dow Jones and Australia’s ASX 200 slumped to over half their pre-crisis levels, whilst markets in Asia including Hong Kong and Japan were at levels some 60 per cent off pre-crisis highs.

Over the course of 2009 however, financial market conditions improved dramatically, as it became apparent that Government and Central Bank intervention had successfully prevented a financial system collapse.

The Australian economy showed particular resilience in the face of the global financial crisis. Although still remaining 29 per cent off its pre-crisis highs by year-end, the ASX 200 rose 56 per cent over the course of the year from the lows hit in March.

There were a number of factors that contributed to the local economy’s performance, including:

• Australia went into the downturn with one of the best fiscal positions in the world. This allowed the Government to implement an aggressive fiscal stimulus policy to re-ignite the economy.
• Australian banks only had minor exposure to the toxic assets that hurt so many off-shore banks.
• Australia’s commodity based economy benefited from the infrastructure-led development being seen in China.
• The Reserve Bank of Australia aggressively eased interest rates, stripping 425 basis points off the cash rate over the eight months between September 2008 and April 2009. Given the large proportion of Australian households with variable mortgages, this helped to free up consumer expenditure.

These factors helped Australia avoid a recession, assisted in keeping the unemployment rate at relatively low levels and boosted consumer and business confidence levels.

Australia was also assisted by its trading partners, largely its Asian neighbours, and its strong commodity sector. A tailwind was provided by China in particular; whose infrastructure development continued to support the demand for Australia’s resources.

By the end of the third quarter, Australia’s better than expected economic performance led the Reserve Bank of Australia (RBA) to start increasing local interest rates. In fact, Australia was the only developed nation to raise rates three times last year, increasing interest rate differentials and hence demand for Australian currency.

Meanwhile, US interest rates remained at between 0 and 0.25 per cent, as it continued to struggle with high unemployment, growing fiscal deficits and lingering housing difficulties.

The continuing vulnerability of the global economy became apparent late in November 2009 as markets were spooked by news of a possible debt default by Dubai. Other similar debt concerns in Greece and Spain also indicated that while the financial system may have stabilised, that risks to recovery still remain.

This continuing volatility highlights the fragility of the financial system and the weak findamentals in place at the end of 2009. Whilst Australia appears to have avoided a technical recession and indeed remains relatively well positioned, the economies of developed nations such as the US and UK remain precariously placed.

The focus now must shift to working through repairing the remaining damage - to ensure a sustainable recovery for all.