If you cast your mind back to just before Christmas two years ago the financial world appeared destined for the grave. Lehman Brothers had just collapsed, the Governments started taking on toxic assets and the Australian Government implemented a guarantee on deposits to restore confidence amongst the consumers.
Australian Interest Rates started falling but at nowhere near the rapid reduction that was seen in the United States and Europe. The word ‘sub-prime’ became an everyday conversation and it was later discovered that American Banks gave out NINJA loans (no income, no jobs or assets) to unsuspecting American citizens. This resulted in almost one in five Americans owning a home with more debt than the actual value of the house.
The Australian Market was down 52% and price to earnings ratio’s sitting at around 8 times (long term historical levels are 14.8).
That Christmas was a pretty nervous one for many investors and employees.
This Christmas holiday season paints a much brighter picture with the market recovering 46% and price to earnings ratios now sitting at closer to 13 times. We are currently living in a rising interest rate environment which demonstrates the power and resilience of our economy. Although our markets are still linked to the movements in the US, we now have other influences such as Asia and the emerging markets. The expectation is that the Australian economy will grow at 3.5 to 3.8% per cent next year and the resources boom is expected to continue for another 20 years (as announced by the RBA).
So are we still on the rollercoaster?
There are some more expected dips in light of recent financial system collapses in Ireland, Spain and Portugal and whilst Europe and US get back on the track but the positives seem to outweigh the negatives with the power economies of Asia providing great momentum for the world economy.
Based on this, it is suggested that you review your current investment portfolios in the new year to ensure you have allocations to the growing economies as opposed to those on a dip.
In our recent e-book, ‘Investing in Equities’, (click here to download) we explain our investment theory behind maintaining and increasing exposure to the market. This is the core strategy and it is employed to try to achieve long term capital growth, irrespective of the short term fluctuations in the market.
This strategy is validated based on the recent Russell and ASX report comparing 10 and 20 year performances of various asset classes. It showed year on year returns of between 8 and 11% per annum in both the Australian Residential Markets and Australian Share Market. (for more information click here)
We want to take this opportunity to wish you and your loved ones a happy christmas and a 2011 filled with health, wealth and wisdom.
The Ark Team
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