While it might be difficult for investors to understand the details of what is happening in the world economy, they can learn from the big picture and its effects, says Mr Chad Padowitz, chief investment officer at Wingate Asset Management.
“Improved understanding of the cause and effect can help investors appreciate why they may need to adjust their investment approach.
“Fears of a double-dip recession in the US; concerns about the future of the European economy; and talk of a slow-down in China are all worrying issues that investors, understandably, can find confusing.
“Put simply, the big picture of what is happening in the world at the moment is a mass deleveraging that is creating a major hangover for most economies, and this is what investors need to appreciate.
“It is something that started well before the global financial crisis and the subsequent debt concerns in Europe and the US, and it is this that has resulted in what is now called the ‘new normal’,” he said.
Mr Padowitz said that since the end of World War II, the world has looked for, and found, new ways to borrow more money, creating a situation of huge leveraging.
“Population growth helped drive up asset prices which have provided a platform for the leveraging, but this was never a sustainable situation in the long-term.
“The phase we are now in is coming to grips with how this debt can be repaid and what will be the effect, and it is this uncertainty that is affecting all markets.
“There are three ways for governments and central banks to try to stop these trends. They can either pay-down debt; inflate the debt away; or default.
“Whatever steps are taken, they are likely to lead to lower living standards in the countries most affected.
“This situation means less certainty about the future; market returns becoming much less linear; more share-market volatility; and upward trends less likely.”
Mr Padowitz said that while Australia is not immune to these problems, particularly if China wobbles, we are certainly in a much better position than most – and there are still good options for investors.
“Australia can go one of two ways, with some market commentators believing that Australia has entered a new expansion phase, and others convinced we are about to enter a recession.
“Wingate believes the best approach for Australian investors is not some new technique, trading model, or reliance on complex leveraged financial products that may increase opportunity for gain but which will increase risk even more.
“It is a time when a slightly modified but good old-fashioned diversification strategy comes into its own and for Australian investors to take advantage of their more favourable position.
“Investors need diversification, not just by using different asset classes, but by diversifying within asset classes.”
Mr Padowitz added that investors should also manage any inherent risk by avoiding anything with leverage, and seeking income from shares rather than only capital growth.
“As an example, in domestic equities some companies offer good buying because of both yield, enhanced by franking credits, and long term prospects.
“Having said that, there are limits for diversification within Australian equities as it is still a very small market and some very attractive sectors, such as pharmaceuticals and technology, are virtually non-existent here.
“International equities should be added to investors portfolios as they still offer good opportunities and benefits as they are reasonably cheap by historical standards.
“For Australian investors, the still-strong currency also means that they are particularly good value.
“Investors should therefore look for high quality companies, both domestically and internationally, concentrating on those that have the resources to manage their way through difficult times, and have no, or very little, leverage risk.
“At Wingate we also look for companies that earn their money from different countries – Nestle and Coca-Cola are good examples of this. Similarly, we prefer to invest in a global energy producer rather than one focused on one market – for instance an oil company that derives most of its income from the UK is very vulnerable to policy changes in that country such as any increase in the oil tax.
“Share-markets will most likely track sideways for some time, and investors need to benefit from careful stock selection in order to ensure solid returns and minimum risk,” he said.
Wingate Asset Management is a boutique international equities fund manager with a large- company, value-based, investment philosophy. Its investment process seeks to combine long term capital growth with continual income generation. The business was formed through a joint venture between Australian Unity Investments and the Melbourne based Wingate Group.
For more information please contact:
Chad Padowitz – 03 9913 0704
1 November 2011