We Follow the Leaders

A major advantage of being a small contributor (but an important one) to the total global economic activity lies in the propensity of markets to topple in a sequence dictated by size. This statement is more of a generalization than a perfect representation of reality but the generalization does serve to provide an indication of what lies ahead.

When the local underlying fundamental economic indicators are moving in the same direction as those of the larger markets (down), the suggestion of a continuation of the decline is highly probable.

Personal financial and corporate pressure often results in some brokers encouraging investors into share market and share market related investments only for the investor to see a large percentage of the investment value dissolve.

Superannuation is also being decimated as fund managers are either unwilling or unable to switch to cash. Those who operate complying self managed funds have been able to move the funds into the safety of cash management vehicles paying better than 4%. The result is that self managed funds are producing a positive return while a positive return in managed superannuation is a rarity.

The Australian share market is caught in the turbulence of the sinking markets of the United States and other overseas markets. The vacuum created will draw the Australian markets down and the current analysis suggests a substantial drop lies ahead.

The residential real estate asset class continues to provide opportunities in the outer suburbs of all capital cities with the exception of Sydney and Melbourne. Many regional centres have yet to see the full complement of capital growth for this cycle and also provide a window of opportunity.

Both fundamental and technical analysis shows that the Australian economy will decline for the next two years. The Australian economy itself is robust as a result of outstanding management by treasury and the reserve bank and out performance by various industrial and resource sectors. However, the future growth prospects for Australia are tied to growing economic activity within the major world economies.

The performance of the major industrial economies will determine global economic performance and consequently the Australian economic performance

The opinions of the older economists in Washington suggest that coordinated policy in relation to exchange rates may provide an answer. They quote the exchange-rate agreements reached at the Plaza Accord in 1985 and the Louvre Accord in 1987 as a possible course of action.
The argument in Washington is that Europe and Asia play a greater role in the process of economic recovery. The question is whether this attack of amnesia in relation to “fair trade” principles precedes a new trade paradigm or a temporary tool of convenience.

*This article was taken from Volume 2, Issue 2 of the “Financial Grace” publication released in November 2002

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