It’s a scary thought isn’t it?

The message I want you to read is investing intelligently is as much about protection of your capital against loss, (be them losses from taxes, opportunity cost, or our investment decisions) as it is about capital growth.

So just because the market has rallied over the last 3 weeks, doesn’t mean we should be rushing back into the market with massive gearing and all our cash.

What? A financial advisor telling us not to invest? I thought you’d say that J. Well it’s not exactly true however I want you to be acting cautiously as we invest moving forward and I hope this information helps you with your decision.

Here’s what we know!

The Heavy Stuff!!!

1.     Global investment markets have continued to deteriorate

2.     Reporting season results from companies showed slowdowns in sales, company earnings and projected earnings

3.     There is a view that earnings from companies is still to high and has not fully reflected the world economic slowdown

4.     Money lent between banks, institutions and governments continues to be fragile and lacking confidence

5.     We are going into this world recession with knowledge of how to better manage country and world economies

6.     Massive injection of money into economies (over 3 trillion dollars worldwide) is in process

7.     Share prices are looking attractive as they have been predominantly oversold

8.     Both government and corporate debt is low compared to past recessions.

Silver Lining to the Dark Clouds

1.     Governments around the world are doing something proactive and injecting massive capital into the market to keep banks lending

2.     The banking system is being secured with government backing of cash in banks (free up to $1,000,000)

3.     Governments around the world are purchasing distressed assets from banking institutions giving confidence to lenders

4.     Interest rates are being cut to historical low levels globally

5.     Cash hand outs are being given to consumers to encourage spending

WIFM (What’s In it for ME?)

Shares have generally been oversold and offering investors long term value. From what we know (historically) the P/E ratio (price of a share divided by its earnings) is 14.3 over the last 20 years. Currently the PE ratio is approx 8.1, representing indicated value

Dividends from shares are looking attractive at average of 7.3%, compared to bonds and cash at 2.3%

In a historical reference, shares have generally had their biggest losses in the first third of a recession. To date we are approx 50% down from historical highs reached in Nov 2007. Post these sell offs shares have rallied (see attached All Ords Index since 1900)

The Outcome

From our perspective we still see economies around the world deteriorate and unemployment rise. Banks and governments while starting to lend to each other again are still pricing in risk of lending funds to businesses (hence not reducing rates on business loans). This combined with uncertainty from businesses when making forecasts about future earnings does not support a string rally. In short economic fundamentals are just not there to support a string V shape rebound.

That said shares in our research and economic news shows good long term value and as they are generally speaking a leading economic indicator (employment is a lagging indicator) . Supporting this is our view that it would seem the worst has already occurred for share investors. The support (lower interest rates, cash bonus, government guarantee’s) and stimulus from governments combined with the willingness to do whatever it takes, supports our view of a cautious approach to now re-enter the market.

The next step is yours…

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