Investment markets

When will world financial markets recover?

This is a question that everyone wants answered and one that is hotly debated by professional investors. Such investors hold varying opinions on ‘when world financial markets will recover’. These views are in large, supported through economic indicators; statistics about the economy. They indicate what has happened in the economy, and may also signify its future performance.

Given the abundance of economic news in the media, here’s a snapshot of a few economic indicators that are the focus of professional investors.

1. Chinese Purchasing Managers Index (PMI): The Chinese PMI is a package of indices, covering purchasing and supply managers of more than 700 manufacturers across China.
   
   The Chinese PMI is a good indicator of the health of China’s manufacturing industry; an integral part of the world economy given it’s a touch point for so many companies and industries. It is also seen by many as the backbone of China’s economy.
   
   The Chinese PMI strengthened for a fifth straight month in April to 53.5 per cent – where any reading above 50 suggests an expansion of the industry.
   
   
2. US Retail Sales: Retail sales are an important economic indicator because consumer spending drives much of our economy. Given the US is globally, the number one consumer, strong demand in the US fares well for the rest of the world.
   
   Strong retail sales also provide a gauge of consumer sentiment, given it directly reflects when consumers are willing to open up their wallets.
   
   Whilst US consumers have increased spending over the last few months, retail sales figures are still 12 per cent lower than the hefty heights set in late 2007.
   
   
3. Corporate Debt Spreads: Corporate debt spreads indicate the health of credit markets. The LIBOR-OIS is one particular spread that indicates the confidence that banks have in lending to one another. A higher spread is typically interpreted as an indication of reluctance by major banks to lend to one other, while a lower spread indicates more confidence in the stability of the financial system.At the height of the credit crunch, banks lacked the confidence to lend to one another as the LIBOR-OIS spread spiked considerably in October 2008.
   
   Whilst it is still above long-term averages, it has since dropped substantially. This is a promising sign given the key to any sustainable recovery is to restore confidence in the banking sector.
   
   
4. Unemployment: The unemployment rate is a lagging indicator, meaning it tends to indicate what has happened in the economy and not what is going to happen in the future. Since it’s a lagging indicator, unemployment can worsen even after the economy starts to improve.
   
   These four economic indicators are only a few that are monitored by professional investors. They all help to paint a picture of the performance of the economy and how it will perform in the future.
   
   They don’t specifically answer the question of exactly ‘when the world financial markets will recover’, however they do send strong signals to the market and help mould investors’ perception of where the economy is positioned.
   
   Whilst there are many different opinions on the exact timing of the market recovery, markets have always recovered in the past and therefore it’s expected that they will recover again.
   
   The recent volatility and market movements may have you thinking of switching your super investments out of growth assets like equity and into more conservative assets like cash. However, it’s important to consider whether changing your asset allocation is appropriate for your personal situation, and whether it supports your long term strategy.
   
   We recommend you speak to your financial adviser if you have concerns about your current investment strategy or asset allocation.
   
   As a member of your corporate super fund you have access to Momentum Financial Advice. This service involves financial advisers providing general advice over the phone, at no cost to you. You can also attend an initial face-to-face consultation with an adviser, who will assess your personal situation - again at no cost to you.*
   
   If you would like further information on Momentum Financial Advice call a Plum Member Services Consultant on 1300 55 7586 who can put you in touch with an adviser directly.
   

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