Market Update – July 2011

Happy New Financial Year, my inbox has been filling with the market and economic updates from the analysts at Macquarie, Perennial, JB Were and Commsec with talk of what has been impacting the markets over the last few months I have put together the below based on comments from the analysts to give some perspective and context to the current state of play in the share markets.

Market and Economic Brief

Although the long term view in the Australian Market is looking stable for sustained economic and profit growth from our blue chip companies, the long term seems to have been forgotten during the month of June as the share markets reacted to concerns on the strength and momentum of the current global recovery.

Shares have been weaker since April when the ASX 200 Index looked like going through and sustaining above 5000 points.  This was short lived again but as mentioned earlier the underlying economic numbers are still looking good and should provide good long term outcomes.

For the Financial year to date the ASX200 returned 11.9%.

Greece and Their Debt

This has been the biggest ‘known’ issue in the market along with that of the US Government Debt concerns that is playing on investor confidence.  But it is good to keep this ‘noise’ in perspective.

With €4.4 billion of Greek short term debt maturing mid to late July, it was critical that the fifth tranche (worth around €12 billion) of the €110 billion EU/IMF assistance package was paid.  European finance ministers played hard ball, making further payments conditional on the Greek parliament voting on an austerity package worth around €78 billion. Thankfully, the Greek Parliament voted in favour of the package late in the month, reducing fears of a near term default.

Putting some context into this, we all know that if an individual borrows too much and doesn’t have enough income to even pay the interest on ballooning debt, the individual is likely to become bankrupt. So, is the whole developed world (excluding our own backyard) bankrupt?

Well, governments have a few advantages over individuals in terms of borrowing. They tend to hang around longer than most people and they have much more control over their income and expenses than you or I do, raising taxes (or even inventing new ones) and decreasing expenses almost at will. Also, most governments have little problem in persuading the markets to finance their bonds. They also know that they collect less money when times are tough and tax receipts will increase dramatically when the economy is riding high. Weaker governments can, and do, default on their debt obligations from time to time (particularly in developing economies), with sometimes disastrous consequences.

My point here is that governments can, and do, sustain much longer term debt than individuals.  We are probably a little way yet from clear and smooth sailing in the share markets but the same approach still applies, ensuring your have quality concentration of companies who will be around longer term to continue providing income and growth returns to your portfolio.  Diversification is the key!

If you have any questions or concerns with regards to your portfolio please do not hesitate in contacting me at the office.

Scott

Scott Malcolm (scott@money-mechanics.com.au) is Director of Money Mechanics (ph: 6257 5557) a fee for service advice firm who are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.

The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs.  Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.