6 JULY 2012

The Economic Problems Persist

The 2011/12 Financial Year was best characterised as being a continued hangover from the Global Financial Crisis (GFC). A heightened level of concern around the sovereign debt crisis in Europe, along with worries about the global growth outlook, dominated the investment landscape.

For the 2011/12 Financial Year, the main results are:

It can be argued the European debt crisis represents the second phase of the deleveraging process that began with the unwinding of the US housing bubble in 2007. This second phase has close links between excessive sovereign borrowing and a poorly regulated and run banking sector. Unfortunately, these issues do take time to play out and are not easily fixed. Consequently, share markets have remained unsettled whilst all the posturing for solutions continues to drag on the outlook.

Closer to home, after outperforming International markets for a number of years, Australian shares have continued to underperform for the second financial year in a row. It is incredibly perplexing that our economy is better positioned that most others yet our share market is underperforming. A combination of a strong $A, offshore divestment out of Australia and, most critically, concerns around a slowdown in China are principally the reasons why our share market has underperformed.

The big question is – What is the outlook for share markets for the coming 12 months?

There is no doubt Australian shares are attractively priced as measured by most valuation metrics. Relative to returns now available on the traditional defensive assets classes such as bonds, cash and fixed interest, the dividend yield on Australian shares is particularly appealing at above 5%. The same can be said of Australian A-REIT’s (Listed Property), where average yields of 7% -8% can be obtained.

All that said, whilst concerns around the global growth outlook remain, share market conditions are likely to remain subdued. Whilst global economic factors continue to occupy investor’s minds, capital gains will remain difficult to obtain in a risk adverse environment. As such, we expect dividends will be critical to total shareholder returns in the coming 12 months.


Paul Nicol
Senior Financial Planner
Authorised Representative No. 230876

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