Greetings and Happy Christmas!
Well the US Fed finally lifted their rates last week for the first time in close to a decade. Importantly the accompanying statement from the Fed Chairman Janet Yellen made clear that future increases would be measured and based on future economic data this was interpreted as a clear sign that future rate rises will gradual. Currently the market is pricing in between two and four further increases of 0.25% in the next calendar year. The increase had been well telegraphed by the Fed and hopefully marks an important day in the ending of the “Global Financial Crisis” and the resumption of more normal interest rate policies. While negligible interest rates have encouraged the recovery of the US economy it has badly distorted traditional savings patterns which really is reflected now in most Western economies. The graph below showing US Interest Rates since 1986.
As we get ready for the Christmas break it is a good time to reflect on the year and plan for the future. My own reading on the GFC is Ben Bernanke’s “Courage To Act” which spelt out in great detail the decisions that had to be made to stabilise global economies. While we were a little removed in Australia the sheer enormity of the crises which engulfed so may household financial names in the US and Europe naturally has taken a significant amount of time to work through. Many of us still vividly remember the late nights trying to understand and react to a once in a century event that has made a deep imprint on how the community views the security of their money. Even now, while global equity markets appear to have recovered, there is still some deep scares which will take a long time to heal. Global interest rates still remain very low to stimulate growth and with correspondingly low levels of inflation seem unlikely to change much in the short term.
Locally, the equity market index was broadly flat for the year but continued to pay out dividends well above cash rates. The index is heavily dominated by the four major banks all of whom raised significant capital later in the year which contributed to a decline in absolute terms of their share prices over the year. Resource stocks were very weak reflecting low Iron Ore prices and this situation seems unlikely to change in the medium term. Highlights were the health and aged care sector where innovation and changing demographics all helped to produce some very good results . A number of our small company fund’s invested in this sector and benefited accordingly with good stock picking still proving rewarding. Next year look for quite a lot of Merger and Acquisitions activity as companies use cheap funding costs to buy up competitors.
Sydney property prices do seem to be stalling based on auction rates and a general appreciation in the community that after three good years and some substantial gains at least on paper a period of consolidation looks probable. This is a welcome sign longer term and will reduce the prospect of a bubble and sharp decline in asset values next year. Lending standards have tightened which again will discourage marginal developments from proceeding and should add to price stability. The city is rapidly changing with significant developments around Barangaroo beginning to complete and should be an exciting time for our community.
In our own news we had a great 25th party down at the Manly Skiff Club last week and will do something similar for our city clients next year. We will close on Xmas Eve and reopen on the 4th January.
Wishing you a peaceful break.
Sincerely
Tony
