Updated November 12th 2013

Most of us like to stay up-to-date with how the markets are going. However, when markets are volatile they hit the headlines, and there always seems to be more stories compared to when markets are performing well. Fear sells newspapers!

Countless times over the first 2 weeks of August I heard the television media state words to the effect of “$65 billion wiped off Australia’s Retirement Savings!!” Over that same period, our market had days of strong recovery, but not once did I hear “Markets add $65 billion in one day!”

While it’s good to be knowledgeable about what’s going on, when thinking about your investments it helps to remember that market downturns are a normal part of the market cycle. It’s natural to feel unsettled during uncertain times, we’ve seen it all before – the important thing is to assess whether the fundamentals of the actual companies that you are investing in are in good shape. If so, don’t panic, they will still continue to deliver the results in terms of profits and dividend increases, despite a reduction in share price.

Some key points to take out of current global events and panic:

  • Debt problems in Europe and the US have little direct impact on most Australian companies.
  • Australian companies are generally in good financial shape as they already reduced costs and debt in the peak of the Global Financial Crisis, so are now better placed to cope with current market and economic conditions.
  • Dividends across the board have recovered from GFC levels – and continue to increase in the companies that are performing well.
  • The Australian economy remains well positioned (but not immune) from a potential global economic downturn with our extremely strong fiscal position, and our unique leverage to China and the high growth Asian economies. Currently, China is the destination for 25% of our exports, compared to the US with just 4%.
  • Australia’s national debt-to-GDP ratio is also expected to peak at approx 21%.

Some key points to take out of current share market prices:

  • Only once every 5 years or so can you buy the best Australian companies on single digit Price to Earnings Ratios.
  • At the time of writing, based on recent share prices, the market is assuming our best companies will have zero growth in perpetuity – clearly a highly unlikely scenario.
  • The situation now is very different to 2008, Australian banks and corporates have very strong balance sheets and low debt. There are few stocks that are likely to have refinancing troubles.

Can markets fall further? Of course they can – if markets run off fear & not fundamentals.

While a global recession remains a distinct possibility, there is little doubt that the world economy is entering an environment of slower growth and lower returns.

As a result, it makes sense that investors seek the defensive positioning of the stronger, relative growth of the Australian economy and Australian equities. In a climate of lower expected returns, we believe that dividend stability and dividend growth will be an important differentiating factor.