The stock market continued to perform well in March with the ASX 200 up by 5.7%. The MSCI World Net Index rose by 5.9% in US$ terms and 3.6% in A$ terms.

As I write this the Dow Jones Industrial Average is knocking on the door of the 11,000 level and the ASX 200 is closing in on the 5000 level. Australia continues to be one of the best performing economies in the developed world with continued strong demand for our resources.

The Reserve Bank raised interest rates by 0.25% again this month taking the official cash rate to 4.25%. This has had a flow on effect to consumers via increases in mortgage rates. It is obvious that the RBA is concerned about inflation - our strong economy and relatively low unemployment rate indicate that this is not the last of the rate rises. RBA bank governor Glen Stevens appears committed to getting rates back to “normal levels”. 

While official interest rates are rising, the sharemarket seems to be taking the increase in interest rates in its stride. Certainly investors have been anticipating a certain degree of monetary tightening. The test going forward for companies will be how they deal with rising cost pressures and higher interest rates.  At the same time the market is expecting a return to profit growth due to increasing revenue and the fact that companies should start benefiting from recent cost cutting measures.

The property trust sector seems to be stirring with Mirvac raising $350 million in just 24 hours last week. However last month the S&P/ASX 200 Property Accumulation Index recorded a return of -0.1% significantly under performing the broader stock market. Early on during the GFC a lot of debt was renewed for three years which should make 2011 very interesting for companies with significant debt maturing then. I predict that the demand for loans will be artificially inflated during 2011 and that fact coupled with higher interest rates will play very well for the banks of this country.  That’s why I continue to own banks and blue chip stocks.

As the market climbs a wall of worry investors need to be mindful of their asset allocation. There is still a large amount of money in cash and investors who procrastinate may well miss the boat. As always I suggest investing regularly to reduce your timing risk.

With the Labor Federal Budget looming I encourage our customers to consider topping up their superannuation contribution to the maximum level and making any undeducted contributions prior to the budget. Certainly some of these areas are seen to benefit the “well off” and in an election year populist policies are likely to emerge.

The government is keeping a tight lid on the Henry Tax Review while it prepares its response. There is no doubt that changes to the tax system in an election year are politically dangerous. However it appears that Prime Minister Rudd is succumbing to pressure and we may see a release of the report before too long. Speculation is that it might be released around the same time as the budget.

The effects of this comprehensive tax review will be far reaching and will probably be implemented over many years. However with the governments huge spending during the GFC producing a significant deficit and huge sums being promised to reform health care it is unlikely that Australians will be paying less tax in the future.  The States are cash strapped and are refusing to sign off on the Prime Minister’s health reform plan until they see the Henry tax review. Like most capitalists I am not a fan of taxes and to quote the late Kerry Packer:

Of course I am minimising my tax. And if anybody in this country doesn't minimise their tax, they want their heads read, because as a government, I can tell you you're not spending it that well that we should be donating extra!

The scandals associated with the Building the Education Revolution Program and the Home Insulation Program clearly illustrate this point.

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