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Financial Happenings Blog
Thursday, July 12 2018

As a new financial year gets underway in Australia, the media tends to be full of outlooks about what investors can expect for the coming 12 months. These pieces are often entertaining to read, but can be even more so a year later.

Many Happy Returns

Posted by: Scott Keefer AT 07:49 pm   |  Permalink   |  Email
Thursday, October 06 2016

Hillary or Donald?  Should investors be making adjustments to portfolios based on their view of the upcoming election?  If history is any guide, you would be better served switching off the noise and focussing on the long term strategy.

Posted by: Scott Keefer AT 02:30 am   |  Permalink   |  Email
Tuesday, July 19 2016

Terrorist attacks in France, coup attempt in Turkey, war in the Middle East, refugee crisis in Europe, BREXIT, a looming devisive presidential election in the USA, political deadlock in Australia ... with issues like these dominating our daily news feeds it is very easy to get depressed about the outlook for Australia and the world.  However,  it is not all doom and gloom especially if we take the time to look at some of the progress the world has made over a longer frame of time.

Jim Parker from Dimensional Fund Advisor has recently penned the following article reminding us all of some more positive developments.  Well worth a read and some reflection!!

Posted by: Scott Keefer AT 09:35 am   |  Permalink   |  Email
Friday, January 18 2013
I am in the process of writing a client update for clients reflecting on the past year and looking forward. The overall results have been pleasing with all major investment asset classes (barring cash) performing strongly.

If we look back at where we were at the beginning of January 2012  I think it would be fair to suggest that sentiment was poor.  2011 returns had been poor for everything other than bonds.  There did not seem to be any major progress with the European debt crisis, growth was slowing in China and the US had only a few months previous been through a bruising political period culminating in the downgrade of the credit rating of US government debt.  Not a great environment to provide confidence for the year ahead.

So why did things turn out so much better than what we might have expected?

The key driver in markets through 2012 seemed to be the hunt for yield underpinned by developments that were more positive than expected:

1) Increased Central bank stimulus measures including here in Australia.
2) The Chinese economy seems to have picked up after what appears to have been a stable political transition.
3) The US avoided the fiscal cliff  ... for now.
4) Euro breakup fears eased after the head of the European Central Bank (ECB) Mario Draghi  saying that the ECB will do whatever it takes to save the Euro

So what can we learn from the events of 2012?

Three really crucial lessons were evident for me:

1) Whilst current news might look negative (or positive), it's what happens next that is important for investment markets.
2) Trying to predict the next move for markets is very difficult.
3) The benefits from diversification are alive and well.

Jim Parker from Dimensional thrashes out these points in a little more details in his latest Outside the Flags article - Many Happy Returns.  The article included some interesting data about returns from 20 developed markets and 20 emerging market some of which you might find surprising.  I have included his article below.

Here's to a good year for 2013 hopefully with plenty of surprises on the upside!!


January 17, 2013
Many Happy Returns - updated
Vice President

The summer holiday season encourages media retrospectives about financial markets. It's fun to match these up with what people were saying a year before.

In December, 2011, the publication Barron's told investors to "buckle up". The consensus prediction of its panel of 10 stock market strategists and investment managers was for the US S&P-500 to end 2012 some 11.5% higher at about 1360. 1

"That sounds like a big gain, but a lot of things have to go right for the market to make such impressive headway," the writer said. "Even the most bullish of these Street seers fears stocks could be more wobbly in the next six months than in the six months past."

There was so much for forecasters to get right - a negotiation of the Euro Zone crisis, uncertainties over the growth of earnings, the roadblock of the US presidential election and the challenge for emerging economies to sustain high economic growth rates.

More than a year later, markets are still grappling with many of the same issues, though from different angles. Much of Europe is either in recession or growing only modestly, unemployment is high and a number of countries that share the single currency are unable to pay their debts. The US presidential election gave way to worries over the so-called "fiscal cliff", while Chinese exports have been hit by the slowdown elsewhere.

In the meantime, however, there have been solid gains in many equity markets, including parts of Europe and Asia, as well as North America. That Barron's panel forecast of the S&P-500 reaching 1360, which the magazine said was ambitious, turned out to be conservative. The index ended the year 13% higher at 1426. What's more, some of the strongest performances have been in emerging and frontier markets.

The table below shows performances for 2012 (to December 31) and annualised returns for the past three years of 20 developed and 20 emerging markets, using MSCI country indices. Returns are ranked on a year-to-date basis and expressed in Australian dollars.

Among developed markets, three members of the 17-nation Euro Zone - Belgium, Germany and Austria - were among the top performing equity markets last year. Leading the way among emerging markets was Turkey, which regained its investment grade ranking from agency Fitch in November.


While not one of the very top performers, the Australian market nevertheless delivered solid returns of 20% for the year despite the difficult international circumstances and the uncertainties at home over the extent of the slowdown in the domestic economy.

And while much of the media focus has been on the so-called BRIC emerging economies of Brazil, Russia, India and China, the real stars in the emerging market space these past three years have been the south-east Asian markets of the Philippines, Thailand and Indonesia.

There a few lessons from this. First, while the ongoing news headlines can be worrying for many people, it's important to remember that markets are forward looking and absorb new information very quickly. By the time you read about it in the newspaper, the markets have usually gone onto worrying about something else.

Second, the economy and the market are different things. Bad or good economic news is important to stock prices only if it is different from what the market has already priced in. My research colleague Jim Davis has done an interesting study on this. 2

Third, if you are going to invest via forecasts, it is not just about predicting what will happen around the globe. It also requires that you to predict correctly how markets will react to those events. That's a tough challenge for the best of us.

Fourth, you can see there is variation in the market performance of different countries. That's not surprising given the differences in each market in sectoral composition, economic influences and market dynamics. That variation provides the rationale for diversification - spreading your risk to smooth the performance of your portfolio.

So it's fine to take an interest in what is happening in the world. But care needs to be taken in extrapolating the headlines into your investment choices. It's far better to let the market do the worrying for you and diversify around risks you are willing to take.

In the meantime, happy new year and many happy returns!


1. 'Buckle Up', Barron's, Dec 19, 2011

2. Jim Davis, "Economic Growth and Emerging Market Returns", Dimensional, August 2, 2006

Posted by: AT 10:01 am   |  Permalink   |  Email
Wednesday, November 07 2012
Spending a lot of time in Indonesia I read the local papers, talk to local business owners and managers and sit in places like Starbucks watching what is going on.  The economy is growing strongly with a lot of that growth coming from investment in the resource industry but also strengthening internal consumption via a growing middle class.  The malls are full, cars are selling strongly and a growing prosperity is easy to identify.

(NB There is still extreme levels of poverty but the signs are positive.)

This runs counter to the outlook we get from major news and media outlets suggesting the world economy is a basket case.  No doubt there are major problems to be dealt with but the news is not all bad.

Jim Parketr in his latest Outside the Flags article, reproduced below, looks at some interesting data about the two major economies in the Asian and emerging market economies of the world.  he points to a similarly positive outlook.  Well worth a read.


November 5, 2012
Go East Young Man
Vice President

The financial crisis and subsequent developed world recession have overshadowed changes in the developing world that have implications for investors everywhere.

These changes–detailed in a landmark new Australian government report on Asia's economic rise–reveal an historic transformation which has shifted the axis of global economic activity and which is creating a huge new middle class.

The report is full of eye-popping statistics. For instance, in the past 20 years, China and India have almost tripled their share of the global economy and increased their absolute economic size almost six times over.

By 2025, the region as a whole is projected by official forecasters to account for almost half the world's economic output.

Asia's Rising Share of World Output
Asia's Rising Share of World Output

Source: Conference Board. GDP is adjusted for purchasing power parity (2011 prices).


The macro-economic statistics are matched by equally arresting micro-economic detail. Between 2000 and 2006, for instance, around one million people were lifted out of poverty every week in East Asia alone. Japan, South Korea, Singapore and, more recently, China and India, doubled their incomes within a decade.

Growing productivity and expanding wealth are leading to improvements in education, housing, infrastructure and governance. The demographic dividend from rapid population growth and more skilled workforces has been rising savings rates.

But this isn't just an economic phenomenon. Lives are being changed for the better. In Indonesia, for instance, the report says children born today can expect to live to their late 60s on average, compared to just 45 in 1960.

What does all this mean for investors? It means a reality check for those downcast over media talk of the global economy coming to a standstill, of growth being a thing of the past and of innovation and progress stalling.

The downbeat mood might be understandable for those living in Europe or North America, but those of us in the Asia Pacific living in the neighbourhood of this massive transformation can still see plenty of cause for hope.

Rising prosperity and living standards in the world's most populous region mean rising business opportunities. Expanding businesses need increasing amounts of financial capital, raw materials and human capital.

With open markets and the free-flow of information around the world, this means opportunities for diversified investors everywhere, not just in Asia, to share in the wealth created via this transformation.

By early next decade, the combined output of China and India is expected to exceed the entire output of the established Group of Seven industrialised nations – the US, Japan, Germany, France, the United Kingdom, Italy and Canada.

"Asia will not just be the most populous region in the world. Asia will be the biggest economic zone, the biggest consumption zone and the home to the majority of the world's middle class," the Australian government report concludes.

"While the shape of the Asian century is not set in stone, there are good reasons to be optimistic. Even if there are economic cycles, as is likely, they will occur around a trend of rising income."

This might be an Asian story, but it is a global change for the better and one we can all share in as investors. It's a story worth keeping in mind when you are bombarded with the bad news from Europe and the US every day.

Posted by: Scott Keefer AT 02:00 pm   |  Permalink   |  Email
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