Investment clock strikes buy

By Rod North, Bourse Communications

Several recent economic indicators have been positive and pointed to the beginning of the recovery cycle in Australia. These include:

• A surprisingly positive March-quarter GDP figure, showing growth in Australia up by 0.5 per cent. 
• Australia is the only major trading partner in the world that has managed to avoid a technical recession, with positive growth prospects for the remainder of 2009.
• Recent survey indicators for consumer and business confidence have all been positive.
• The sharemarket is up by more than 30 per cent from its low in March (S&P / ASX 200 index near 3100), which may indicate the bear market is over and the early stages of a bull market have begun.
• Inflation figures indicate that Australia will remain in a stable interest rate environment for some time. The Reserve Bank, in its July minutes, indicated that rates could still come down further if the global economy showed any signs of deterioration in the last quarter of 2009.
• The market is still faced with tight credit conditions and climbing unemployment. As a lagging indicator, unemployment is now at 5.8 per cent and is unlikely to rise to the Treasury forecast of 8.5 per cent, although it could settle at about 7.5 per cent. The good news is, interest rates may not go up while unemployment is still rising.
• US and China growth figures have also pointed to a more positive outlook. This is further confirmation that the worst of the global financial crisis and its contagion effects on the world is now behind us, with the prospects of recovery a reality for late 2009-2010.

This convergence of good news presents a great opportunity for investors to take advantage of a range of investment options providing some of the best value in shares in years. Although we can never pick the absolute bottom of the sharemarket, equipped with the Investment Clock you can easily identify where you are in the current investment cycle and consult a range of expert financial advisers to assist you on your road to recovery.

The Investment Clock - what's the time now? 

These recent economic indicators are all very clear signs that a recovery is under way in Australia. We appear to have moved past 6 o'clock towards 7 o'clock, where interest rates are now at historical low points as we move into the recovery phase, as indicated on the Investment Clock.

Here is an updated version of the Investment Clock: 

My recently released book, Understanding The Investment Clock - Your Road to Recovery, provides a timely and powerful strategy to guide you on your road to sharemarket and investment success. It sets the scene for your wealth creation by demonstrating that the global financial crisis does not have to be all about doom and gloom. It is about opportunity.

The strategy for your investment success is straightforward: understand the Investment Clock - and use that knowledge to determine the best time to invest, in consultation with your advisor, then capitalise on an opportunity of a lifetime. Falling markets mean falling prices, which is good news for investors. The key is knowing when to strike and the Investment Clock will help you determine your entry point.

For Generation Y and Z there has probably never been a better time to get smart about investing. This is a time to stop spending and start saving, and over time the potential benefits from a disciplined approach to investing could be significant. There are no excuses now, with the sharemarket still at relatively low levels compared to the peaks achieved in late 2007.

The following factors should be considered in selecting the current time on the Investment Clock:

• The bottom of the sharemarket may have already occurred in March 2009.
• Share prices have been on the rise since March, with some stability now evident and value in the Top 50 shares.
• Many companies are still finding it hard to maintain earnings and possibly their dividends over the next year. The August reporting season will be worth watching very closely.
• Capital remains hard to raise unless the company has, or is close to, achieving an 'earnings profile'.
• Investor sentiment continues to be precariously placed, with 'fear' starting to be displaced by some measure of optimism that the worst may be over.
• Retailers are still having their worst time for many years; consumers have stopped spending. June and July sales were showing window signs with 40, 50 and up to 70 per cent off.
• The Reserve Bank has dropped the cash rate by an unprecedented 425 basis points, from 7.25 per cent in late 2008 to 3.00 per cent. Further moderate easing will depend on where the unemployment rate ends up. It is unlikely that rates will go up if unemployment is still rising.
• Interest rate relief is yet to flow on in full to the small business sector to create any real impact and change sentiment towards growth and employment. Margins and costs of borrowing are much higher now because of tight credit.
• Significant downsizing in the labour market is now apparent. Expect a 6 to 8 per cent unemployment rate by the end of 2009.
• Greater scrutiny of executive pay and a higher level of accountability is now being demanded by shareholders. This is being realised in the Federal Government introduction of legislation that will require golden handshakes exceeding one year's pay to have shareholder approval.
• Fund managers are starting to move away from a 'cash weighted' position and back into the sharemarket, yet the overall market volume remains low.

A critical point to remember is that markets do not lose value forever. Gloom hangs over every bear market, leaving investors to struggle with having to face the fact that the market will recover at some point.

The good news is that markets always come back and turn bullish. By looking at how the All Ordinaries has performed since 1908, investors can see that it always moves back to its previous highs and eventually sets new records.

Patience is a key component in the waiting game of sharemarket investment. Opportunities emerge at these times, yet too many investors come to realise when it is too late and the moment has passed, that the time to buy back in was when everyone was selling.

Sometimes, history can provide the best answers:

• The average decline of each bear market since 1969 was 37 per cent, with the ASX All Ordinaries index falling 53 per cent from its record high in 2007.
• The worst bear market was between January 1973 and September 1974, when the index declined 55 per cent.
• Once a bear market ended, it took an average of 33 months to exceed the previous market high.
• The average sharemarket return for the three years directly following the end of a bear market was 62 per cent , or 17.4 per cent per year.
• The average sharemarket return for the three years directly following the end of a bear market was 28 per cent.

About the author

To learn more about the Investment Clock and determine where you think we are on the cycle, visit Bourse Communications website. You can use the Interactive Investment Clock to determine where we are in the current cycle and also learn more about what lies ahead. If you would like to purchase Understanding The Investment Clock - Your Road to Recovery, by Rod North, for $19.95, visit the Bourse Communications website or phone (03) 9510 8309, or visit the company's office at Suite 1.04, 22 St Kilda Road, St Kilda, 3182.

From ASX

ASX Investor Update provides a quarterly update that asks leading experts for their view on the Investment Clock. Recent stories include:

• Trillions buy a little time
• Time for the investment clock

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX").  ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content.  The content is for educational purposes only and does not constitute financial advice.  Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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