17 February 2009
As we head into the first half of 2009, it is clear that the global economy is already in the worst recession since the end of World War II. It is likely that we will see further falls in the price of both mineral commodities and the Australian dollar. But it is not all doom and gloom if you are considering investing.
A weaker currency helps our exports and has, to an extent, shielded our miners from the full impact from the fall in the price of commodities. However, it is becoming apparent that the volumes of sales of both iron ore and coking coal look certain to be reduced.
Investors should remember, however, that the performance of the stock market is based upon future expectations and is therefore an indicator of future economic activity rather than what is presently happening in the real economy. The stock market has always recovered from down turns in the past and we are certain that it will do so this time.
Investors should consider the 2008 share market performance in the context of the long-term performance of the share market - which includes two depressions, two world wars, the Cold War and all kinds of other shocks. Some of these figures may help put the current economic situation into perspective:
· The return from Australian shares since 1875 has averaged 10.3% a year. With inflation averaging 3.9% the real return has averaged 6.2% a year.
· Investors achieved positive returns in 79% of calendar years since 1875.
· Investors have lost money in only 21% of calendar years since 1875.
· 1983 was the best year, when investors enjoyed a return of more than 60%. 2008 was by far the worst performance with a return of negative 41%.
· Prior to 2008, only three calendar years had recorded negative returns in excess of minus 20% - in 1930, 1973 and 1974 share returns ranged from negative 25% to negative 30%.
While there is no doubt more economic pain to come, it is just a question of whether the massive share market falls to date have discounted sufficient gloom and doom ahead, and whether the global authorities have been galvanized to take sufficient remedial action.
The aim for any long term investor must now be to buy quality stocks at very low prices and just as it is difficult to pick market low points and particularly difficult with this particular bear market, it is also not easy to pick "the lows" in individual stocks.
But with the market still down over 40%, it is not difficult to believe that buying now will offer excellent returns over the coming years.
