Looking forward to 2010
Posted: December 22, 2009
A year ago, we were being inundated with bad news and it seemed as if the world was about to implode. Our newsletter asked ‘Where to from here?'. We encouraged you to review your strategy to ensure it was coping with the volatility and uncertainty. We felt that cash flow was the critical issue - if you had sufficient income to meet your needs and service debts, there should be no need to panic. Asset prices would recover over time.
In February this year, markets had fallen even further. Some commentators were predicting the total collapse of credit markets but the actions of key governments averted this crisis. Whilst we could not predict the future, it was clear that many assets were available at bargain prices. ‘What a bargain!' In hindsight, we now know that the bottom of the cycle for the Australian market was on the 6th March.
Our June newsletter suggested there were signs of ‘green shoots' in the global economy and this was reflected in a recovery in share prices around the world. In September there were signs that these green shoots had roots to support future growth. There was growing consensus that the worst of the slump was behind us.
So we are back to the same question we raised this time last year. Where to from here?
Many patterns from past cycles have been repeated. Share markets tend to overshoot - falling too low when everyone is feeling pessimistic and booming too high when investors feel optimistic. The bounce back from March to October reflected the ‘easy yards' as investors realised they had oversold and the share price of many good businesses were too cheap to ignore.
Commentators are debating what shape the recovery will be. Few are expecting a V shape and some worry that growth is not sustainable and we will end up with a W shaped recovery. Others think the recovery will be U shaped as economies struggle for some time. Some have even suggested a ‘square root' recovery √.
Moving into 2010 we expect to see a continuation of the high levels of volatility and a stuttering global recovery. It is likely to be a number of years before markets recover to the levels of November 2007.
It should therefore be no surprise that our feelings about investment strategies remain unchanged. If you have sufficient cash flow to meet your income needs and service any debts, there may be no need to make significant changes to your investment strategy. For those that have surplus cash funds there are still attractive investment opportunities across the various asset classes.