Risks in current investment markets
In managing your retirement savings Westscheme identifies and manages existing and emerging risks. Avoiding risk is not an option for Westscheme because over the long term it is the return earned by managing risk that grows the purchasing power of the money you have entrusted to it.
Given the downturn in financial markets over recent months, this comment seeks to reassure members about Westscheme’s focus on risk management and that it is continuing to monitor the interrelationship between the risks associated with credit markets and the broader economy, and the nature of the imbalances that currently exist.
The overall world economic outlook is weaker than in recent years. The International Monetary Fund is predicting a slowdown in world growth rates to be less than 4% in 2008 and 2009 after reaching 5% in 2006 and 2007. Most countries remain strong enough, however, to avoid recession.
In the short term, global economic growth is likely to slow as the full extent of the fall-out from the turmoil in credit markets plays out. While the US Federal Reserve Bank’s latest moves to stabilise markets appear to have restored some confidence to markets, this may be short-lived if the US economy were to enter into more than a shallow recession.
Reasonable assessments imply that the US economy is currently in a shallow recession with a gradual recovery to occur through the second half of the year and 2009. In these circumstances, it will be important to see the extent of the return to the previous enthusiasm for investment strategies based on high levels of borrowings. A more sensible pricing of credit risk by lenders would be helpful for the long-term economic prospects of the US and global economies.
Credit risks also remain a significant threat to the global economy, although it is possible that global financial markets have now reached the lowest point of their problems. There are also significant risks arising from imbalances of prices and markets:
The Australian economy is being affected by these strong external positive and negative forces. The boost to incomes from, inter alia, higher commodity prices has increased domestic demand and pushed the economy to near capacity in many areas. On top of the fall-out from the problems in credit markets, this has pushed interest rates up. Large sections of the community are feeling greater financial pressures and confidence has been hit. Similarly, manufacturing and other sectors are feeling the strains of operating under a very strong dollar.
At the same time, the current round of contract negotiations for coal and iron ore prices indicate that this year’s increases will be enormous. Receipts from exports of resources could add a massive 6% of GDP to incomes and demand. If anything, this will push the current ‘imbalances’ and dual nature of the Australian economy further – threatening to make the subsequent corrections even more difficult. Thus, while projections for 2008 for Australia remain good, 2009 and 2010 could be watershed years for the Australian economy.
The intention in raising issues related to the various imbalances in the system is not to be alarmist. Indeed, the most likely scenarios for the next few years at least would see none of these issues causing major disruption. However, while certain markets and prices remain out of kilter, risks persist.
Howard Rosario
Chief Executive
23 April 2008
Previous articles from the Chief Executive are available via the links below:
How has super performed over the long term?
Positioning of Westscheme in meeting the Challenges of Market Turmoil
Investment Volatility