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 Financial Happenings Blog 
Monday, October 20 2008

For the second blog of the week I want to refer to a piece written by Jim Parker, Regional Director, DFA Australia Limited.  Jim suggests there are 10 reasons to be cheerful about the global economy and the state of investment markets.  I am sure that neither Jim nor I want to be seen as flippant given the current market conditions but it is very easy to be bogged down in all the "Armageddon" type commentary surrounding us at present.  Jim's viewpoint provides a much more palatable outlook:

 

  1. An awful lot of bad news is in the price. It is the nature of markets to assimilate new information quickly, which means that as we all sit around feeling gloomy, markets have usually moved on.

  1. In bad times, demand for risky assets falls. So the compensation for taking this risk needs to adjust higher to attract investors. Lower share prices relative to fundamentals just means expected returns are higher.

  1. Governments in the US, Europe, the UK and Australasia are pulling out all the stops to recapitalise their banking systems and get credit flowing again. The extraordinary response of risk assets to recent moves on this front shows how important confidence is in supporting markets.

  1. Central banks have mounted a globally coordinated reduction in benchmark interest rates. Markets are priced for further moves. Insofar as banks pass on these lower borrowing costs, this will support business and consumer activity, buttressing the real economy.

  1. Some governments are providing fiscal stimulus to bolster economic activity. Australia, for instance, recently unveiled a $A10.4 billion package. In the US, there is talk of a post-election stimulus plan.

  1. Oil prices, which until recently were seen as a major threat to global growth, have retraced significantly. From late July until early October, crude oil futures fell by 45 per cent from a record $US147.27 a barrel.

  1. According to Dimensional research, the average duration of bear markets in the US from the end of 1965 until the middle of this year was about 14 months.  This one has now lasted just on a year. This is not to claim it is near an end, but the longer it goes on, the closer is the next bull market.

  1. Someone is buying. It's important to remember that on the other side of the trade from all those people liquidating their portfolios and mutual funds are other investors who are happy to buy. While some are market timers, others see this as a long-term buying opportunity.

  1. Unless you have sold your holdings, your losses so far are only on paper. Market recoveries after prolonged downturns tend to come in quick sudden bursts. All you need to do to capture those recoveries is to stay in your seat.

  1. The sun will come up tomorrow. Anxiety over the market downturn is understandable. But there have been crises before. The world moves on and risk appetites have a tendency to reassert themselves.

Thanks for the upbeat assessment Jim.

 

Regards,

Scott Keefer

Posted by: Scott Keefer AT 07:00 pm   |  Permalink   |  Email
 
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