Economic Update – February 2013
It’s my first update for 2013 and some time since my previous update. I should wish everyone a Happy New Year. Unfortunately natural disasters particularly here in Queensland have taken the gloss off the start to 2013, with many people sadly having their lives turned upside down, some for the second time in three years. The impact of this year’s floods on the economy won’t be the
same as the 2011 events, but the QLD Government will still face a hefty clean-up bill that will need to be funded somehow. It will be interesting to see how both State and Federal governments deal with this issue knowing how deeply unpopular the levy was last time.
Better news has been the share market rally that has resulted in our model portfolio returns nudging 17%p.a for the Balanced portfolio and nearly 20% for Growth oriented clients at time of writing. Both International markets and Australian Shares have had a stellar run. This has been essentially the result of confidence returning, or should I say fear retreating. Much money has been sitting in cash and it has started to flood into markets of late. I am pleased that Dolfinwise clients have all been well positioned for the rally and were fully invested over this period. The old adage of being greedy when others are fearful is certainly holding true.
My message at this point conversely is it’s time to start being cautious. It is not a time to get herd mentality. There are still risks in the International situation. Spain and Italy overnight both had political events that should keep us watching the European situation carefully. More relevant though is that share valuations based on earnings are now no longer looking cheap. If the rally continues at the pace it has it will be overshooting. We should expect (short term irrationality of markets aside) a period of consolidation. Corporate earnings and consumer confidence in my view need to pick up to justify a further run in the stock markets. The upcoming reporting season for listed companies will be well worth watching.
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We are removing all remaining high grade bond funds from our client portfolios as we do our reviews at the moment. Interest rates are nearing the bottom of the range and we believe there is little to be gained in yield, return, or protection by continuing to hold these assets. I will be talking to all our clients about what we replace our defensive assets with over the coming period.
I look forward to a prosperous 2013.