Michael Lannon's Commentary

February 2012
It's all Greek to me

Investors in the share market got a strong start to the New Year with the S&P/ASX 200 index rising 5.08% for the month of January. As I write this there has been very little further movement in share prices so far in February.

Whilst positive signs of economic growth are being reported with lower US unemployment and a stronger PMI (Purchasing Managers Index) signalling more economic growth to come there are still a fair degree of risk in the market.

Stop me if you heard this before but apparently on Thursday (9/02/2012) after days of delays, the Greek Prime Minister said in a statement that there was “general agreement” on measures aimed at cutting public spending. This agreement between Greek politicians on a package of “austerity reforms” is one more step towards Greece receiving the second bailout of 130 billion euros from the EU, the IMF and the European Central Bank. However while this step might seem to reduce the risk of a Greek default on 20 March 2012 there is still the matter of getting agreement from a number of parties.

The Greek parliament needs to approve the austerity program (13/02/2012)
The Euro group needs to approve the deal with its political endorsement
Private sector creditors will need to agree to large write downs of their holding

In my humble opinion I would hold off the celebrations for just a while yet as there is still along way to go to resolve Greece’s issues.

In Australia the two speed economy continues with the mining/resources sector continuing to benefit from Asia’s growth albeit at a reduced rate. The RBA chose to leave rates on hold much to everyone’s surprise. This is either good or bad depending on whether you are a borrower or a lender (depositor) and beneficiary of higher rates. Talks of the banks raising rates independently of the RBA has set off another round of bank bashing by the media and politicians. This conveniently ignores the fact that banks are not making money on new mortgages as their cost of funding remains high. If the banks reduce their business lending that will seriously hurt the growth prospects for the Australian economy.

The AUD is currently trading around $1.08 USD and this is leading to further job losses in our already weak manufacturing sector. This coupled with more projected job losses for the finance and retail sectors have raised concerns about rising unemployment and the effect on the economy. To date reported earnings have underwhelmed investors with actual earning coming in below market expectations.

My advice to our investors remains unchanged. Ensure your portfolio is well diversified and balanced across the available asset classes. Buy into share price weakness when it occurs or adopt a dollar cost averaging approach (invest regular amounts at regular intervals) so your portfolio is positioned for the inevitable upturn that follows all periods of economic weakness. This time is not any different despite media reports. Investing is a balancing act between risk and reward. Whilst term deposits might seem attractive investors need to weigh up the risk of not achieving their financial goals with too much emphasis on the short term versus achieving higher returns by taking a measured level of risk over the market cycle.


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Michael Lannon's Commentary

Since 1997, Michael Lannon has been providing members of Australia’s leading professional associations with access to tools and information to help them become better investors. Michael regularly contributes to the Australian Dental Association's News Bulletin and offers investment seminars for DIY investors.

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