14/09/2011 - 10:34

Crises present investment opportunities

14/09/2011 - 10:34

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Investors need to adapt to a more uncertain financial and political world order.

THESE are trying and uncertain times for investors.
The residential property market is in the doldrums, gold continues its wild upward ride, and the US has been experiencing some of the most volatile weeks in equity market history.

European Central Bank chief economist Jurgen Stark has resigned in apparent frustration over the bank’s expanding role in backstopping the region’s finances amid the continent’s worsening debt crisis.

AustraliaSCAN social analyst David Chalke says this adds to a growing sense among Australians that they increasingly lack control over their lives.
Frustrating their desire to feel secure, they feel themselves to be disempowered by an increasingly complex world.

In Chaos Theory and its Application in Political Science, author Joan Pere Plaza of the Universitat Autònoma de Barcelona and Dandoy Ré´gis of Belgium’s University of Louvain, say: “Crises, surprises, sudden and rapid changes, confusions and things out of control prevail in our world and characterise modern organisations.” 

Since the late 1950s, aerospace engineers have used the term ‘unobtainium’ when referring to unusual or costly materials, or when theoretically considering a material perfect for their needs in all respects – except that it does not exist.

Later, it became an engineering term for practical materials that really exist, but are difficult to get.

The unobtanium in today’s society is certainty, most commonly sought after through strong political leadership.

Uncertainty about the health of the world financial sector through the incompetent mishandling of the US debt ceiling, and lack of US-EU political leadership, has also driven a decline in investor confidence.
Many believe that greater regulation and a true cleanout of the corrupt Wall Street financial sector, not bailouts, would bring back a degree of certainty. 

Uncertainty isn’t new, but what remains true is that many of the solutions leaders must weave would seem to need to be made from unobtainium.

So what does this uncertain future hold?

• Global political alliances are likely to be re-aligned in the relentless pursuit of scarce natural resources.
• Protecting and allocating those resources will ensure elevated regional tensions.
• Emerging economic giants such as authoritarian China and India are likely to alter the future global political landscape.
• Longstanding and deep-rooted social, political, religious and ideological differences are likely to bring about increased tension and turmoil worldwide. 

Investors now keep a wary eye on countries that are becoming insolvent, whereas in 2008 they were only worried about banks going that way.

Morgan Stanley global strategist Gerard Minack says the latest share market wobble is: “A continuation of the global financial crisis, with 2009-10 now emerging as having been the eye of the storm – what we’re seeing now is the end of the credit super-cycle.”

While Mr Minack predicts a possible new recession, history shows that when economies de-leverage, investment markets simply mark time.
In similar periods, general market indexes often track in a volatile sideways direction for up to five to 10 years, if not longer.
Australian Securities Exchange CEO Robert Elstone says investors can expect share market volatility to last for up to three years as food and energy prices rise and many developed nations struggle under massive public debt.

“It’s almost impossible for market volatility to dissipate in the short-term, with energy and raw material prices unlikely to abate in the absence of a global depression,” he says.

While Mr Elstone wouldn’t be drawn on the degree of volatility to be expected, he said: “There was no shortage of fear, anxiety and lack of confidence in offshore markets, which often flow to the local bourse.

“Investors were uncertain about the extent to which global markets’ slower growth rates would slump, despite positive corporate earnings locally and in the US and Europe.

“I think the fear factor associated with either financial defaults – be they public or private in the banking system – is probably, as we saw in 2008, the biggest single driver of a global view that global financial risks are not receding.

“If anything they’re greater now than they were 12 months ago.”

Investors who are in for the long-haul, with a 10-year plus time frame, should not be overly concerned about short to medium-term market volatility. 

Savvy investors are always looking for bargains when others are fearful, with healthy profits still in the offing.

The irony is that the stock market is the only store from which people run away when there’s a sale on.

Last month, the Bank of America [BofA] plunged 50 per cent, but jumped back 16 per cent after securing a $US5 billion loan from Warren Buffett’s Berkshire Hathaway.
Similarly, while fearful investors were dumping stocks in the US retail sector, the world’s richest man, Mexican billionaire Carlos Slim Helu, increased his stakes in the New York Times and luxury retailer Saks Inc.

As the regime of Moammar Gadhafi crumbled, the value of South Korean construction firms rose.

Global fund managers and investors pushed the value of companies such as Daewoo and Hyundai Engineering & Construction companies up nearly 10 per cent betting that the new rebel regime in Libya will mean lucrative reconstruction contracts.

The Korea Trade-Promotion Agency, KOTRA, estimates the market for rebuilding Libya could be as large as $120 billion.
Rebuilding projects could include repairing oil refineries, electricity power lines, ports and houses as well as new road construction. 

If your super fund has a long-term growth allocation, professional managers of your equities portfolio often take advantage of similar market opportunities as they arise.

For those closer to retirement, there are a number of opportunities that arise during times of crisis.

If a couple under 65 years makes a large contribution of personal shares ‘in-species’ to the family super fund, they should expect to pay less capital gains tax on the transfer during a major market dip than at a market high.  

Should their fund pay a pension when their shares rebound, tax on future capital gains, or income, will no longer apply.
Self-funded retirees affected by short-term market volatility, and receiving a Centrelink part-Age Pension, would be wise to arrange a revaluation of their assets to boost their fortnightly payments.

To capitalise on a good crisis, be flexible in thinking outside the square, be inquisitive, and pay close attention to the complexities of global scene – as the thirst for knowledge should never be extinguished.

• Steve Blizard is an authorized representative of Roxburgh Securities.


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