2009... Is It All Bad News? Not At All!

By Jason Fittler

This week I want take a look at what next year might be like. As we all shut down for the Christmas break, a time to stop and remember what is important in life, Family.

As we are all well aware over the past 12 months we have experienced one of the great drops in the share market. Your grandchildren will learn about this in school, the lucky ones got to be a part of history. But is it all bad news of doom and gloom? No.

Let’s look at what we know.

Unemployment will move up to around 8% in the next 12 months, this is double the current rate of unemployment. However unlike the Great Depression or the recessions we had to have, this time the governments of the world have acted quickly by injecting money into the system, cutting interest rates and looking to kick start infrastructure projects. If we look at the Great Depression we note that it took governments years to act, this time only months. In my view the glass is half full.

For the 92% of the population which is still employed the interest rate cuts have meant a $12,000 pa saving on the average mortgage of $400,000. The recent falls in oil prices means a saving of around $2000 pa on each car you own. So for most two car middle class families with an average mortgage they will be $18,000 pa better off. Now granted wages will not rise over the next 12-18 months but still there is more money in your pocket.

What about the market?

In the short term we are looking for the market to move back to around 3900 (next month) in the medium term we expect the market will get back to around 4500 -5000 (6 months). We have started to see some of the volatility come out of the market and volume in the US market start to get back to normal. Do not forget that we are all still being paid super. Where is the money going, my guess it is sitting on the side line. At some point these funds will start to get back into the market. The longer it takes the more funds which will pour in. I expect to see the super fund start getting involved in the 2009 year.

Sectors

Financial sector is now almost fully disclosed, with the CBA coming out this week and announcing an increase in the bad debt write offs, the rest will follow. Next dividend cuts, but we all know this so this is already factored into the price. Sure when the announcements come out there could be a small drop but they are good value right now. The financials also lead the market as such I would expect to see them turn up soon.

Resources

Still a little more upside in this sector, but it is no surprise that we still can expect to see China reduce demand.  This is a short term issue (2-3 years) as such you may look to reduce your exposure to this sector when the time is right. Do not worry, for our clients we will let you know.


Industrial

Cheap Cheap Cheap, this sector looks well oversold and there will be good gains available for those who buy stock and not look at them again for some years. Look at the big guys, I do not expect to see big gains in the short term but I like the sector for those with a long term view.

Retail

The big end of the market is in trouble, cars, flat screen TVs etc but those that deal in the smaller end - say purchases of $20-$100 - there is still good times to be had. As mentioned above the 92% will have more money in they pocket and although I think everyone will delay the big purchases they will still be comfortable with the smaller ones. Woolworths is one of my key picks here, JB Hi for those who can handle a little more risk.

Property

15% losses still to come, this sector especially the residential sector is affected largely by increases in the average wage, and I do not expect to see this increase in the short term. I think that this sector still has to bottom especially residential property. If you are a first home owner be patient and use your grant to snag a bargain. In the large listed property trusts this sector is due for a consolidation and sells down. This will take years, if you are in the sector hold on for the income.

Telstra

In the word of Sherlock Holmes, “the game is afoot Watson”.  When two big dogs go to war they are going to be some casualties. So far this has all been on the side of Telstra with there share price losing 9.5% this week. As for the Government, unless they get the Fiber to the Node network built then I guess they will lose votes.

At present there are a couple of things which might happen.

1.    The Government will award the contract to Optus, given that they could not roll out broadband to the country I would not hold my breath on them getting this job done.
2.    The Government opens up the process once again and allows Telstra to get back in.
3.    The Government pushes for separation of Telstra, this will be a long term legal fight as such unless Rudd gets in for another term he will not make good on his promise of a better broadband service.
4.    The government will drop the project altogether and blame Telstra for this to try and save face.

The real issue is simple, Telstra is happy to build the network, but as they are putting $10 billion into it they want to make sure that they are able to price it to competitors at a level which allows them to recover the costs and make some profit for share holders. Overall a reasonable request. At this point I am holding on to Telstra, the issue will become clear in the January when the experts hand down they opinion.  

Until next week.