The marathon election is finally over with Julia Gillard becoming the first elected female Prime Minister for Australia. However it remains to be seen if the Labor-Green-Independent coalition can function effectively as a government. Although it is very early days the varied competing interests and concerns of the people and parties forming this minority government will make it difficult to govern effectively. Although the PM has committed to a full term of government the probability is that we will see another election some time in the next 18 months. In the meantime investors have no choice but to proceed under the assumption that government initiatives around the implementation of the resources tax reforms and shake up of the superannuation and investments industry will proceed. However it is questionable given the political situation whether any reform legislation will be passed.
Concerns about the broader global economy and particularly concerns about US economic growth continue to worry investors. Expectations for global economic growth have been downgraded in recent months driven by a slower than expected recovery in the US and concerns about the possibility of a double dip recession. The growth remains slower than expected and the US housing market remains under pressure. China overtook Japan as the world’s second largest economy.
Europe seems to have settled down a bit but it is not quite out of the woods yet. Asia lead by China is doing OK but the million dollar question is whether ASI can carry the rest of the developed world.
The Australian economy continues to be the envy of the developed world with the key drivers of economic growth continuing to produce strong economic result. The continued resources boom is producing strong mining and gas investment despite the threat of the resources rent tax. The second quarter GDP growth of 1.2% was higher than the market anticipated and brings the annual growth rate to 3.3%. The RBA left interest rates on hold but it will be watching the economic growth numbers very closely.
The Australian share market as measured by the S&P/ASX 200 weakened slightly in August with a decline of 1.2%. Earning announcement were mixed withy analysts downgrading earning expectations for the current year by 3%.
Global equity markets as measured by the MSCI fell by 1.9%in $A terms and 3.5% in $US terms. European markets also fell despite better than expected economic data. In Asia the Japan Nikkei fell by 7.7% largely due to an appreciating yen. China on the other hand rose by 8.1% bucking the global trend.
Bond yield around the world have been declining as fearful investors drive up prices in their search for less risky investments. Low Australian bonds yields make Australian equities attractive at current prices. Solid dividends and potential growth over the coming year are rewarding investors for taking equity market risk but investors remain cautious.
For my money I continue to steadily acquire quality shares and I am constantly on the lookout for investments that can further enhance the diversification of my portfolio.
Michael Lannon
Executive Director