Economic Update - September Quarter
Dear Amanda,
Overview
- The present level of turmoil in world sharemarkets is without precedence and has resulted in a total collapse of fundamental pricing and analysis of shares. By way of example, the USA market swung over 1000 points in 3 minutes on the 10th October 2008. On the 14th October theUSArecovered more than 5% of its previous losses and then the Australian market recovered more than 3%.
- Pricing of shares are at 25 year lows for many blue chip companies with strong earnings growth and dividend flow. However the ability to pick stocks and lock in value is not predictable and will take time to show the intrinsic value due to the ongoing volatility and the unknown impact of market losses on the real economy.
- The contagion effect of debt resulting from the subprime meltdown hasn’t been quarantined to the primary source of the USA and as a result, lack of confidence within the banking sector has spread globally. Confidence takes time to repair and is currently being sought through Government intervention effectively trying to underwrite some of the capital markets failings.
- The Australian banking sector has not been immune to this spread but is well capitalized and enjoys significantly improved capital adequacy compared to global peers. This has resulted in the Australian Government moving to guarantee deposits with a view to instilling confidence and security within the Australian economy in general.
- The US government announced a US$700B support package approved by Congress on 1 October to buy some of the US$1,000B in subprime collateralised mortgage-backed securities. This has been welcomed by some, although criticized by others as inadequate, interventionist and socialist. The same argument applies to the announcement by the UK Government on 8 October to provide US$87B in funding for the banks, particularly with the focus to reduce interbank lending costs through the effective nationalisation of the banks.