With so much activity in the financial markets, and in the circles of those charged with finding a solution to the current crisis, it is difficult to envisage clearly what lies ahead. One of the difficulties in making forward looking assessments at the moment is that there are very few historical precedents which can be used as a basis for deciding the future path of the global financial system.
The consensus view is that high levels of volatility are likely to continue and a ‘normal’ investment environment is unlikely to eventuate any time soon. Many of the largest developed economies are either already in or about to enter recession. Other developed economies – including Australia – and the large developing economies appear likely to continue expansion, albeit at slower rates.
Against this backdrop, meetings of the G7 and G20 groups over recent days have led to a raft of further rescue measures to try and break the cycle of negative sentiment and asset deflation. To this extent we have seen the Australian Government announce an increase of purchases of residential mortgage backed securities (from $4 billion to $8 billion), a guarantee of deposits for all authorised deposit-taking institutions and a guarantee of new and existing bank debt with a maturity of up to five years. In addition, European leaders have recently announced a guarantee of new bank debt for issues until the end of 2009, permission for governments to buy equity in banks and a commitment to assist banks in critical distress. Expectations that the US will progress with a $US700 billion rescue package to purchase direct equity in banks as soon as this week, have also increased.
The range of government guarantees and support being put in place such as the provision of almost unlimited funding by central banks, suggests the sounder banks at the core of the banking system may start re-instating or increasing the lines of credit to their peers quite soon.
Given some time, Westscheme believes the array of measures in place will work. The likelihood of more and possibly concerted government injections of money to lending institutions should also help speed the process. Consequently, it is possible that a sense of stability will return to the funding markets at the heart of the crisis within a matter of a few months.
As for the longer term impact, certainly the global financial system will be changed permanently and significantly. Regulators and markets will demand improved transparency and more appropriate prudential standards.
The Westscheme Trustee’s Selection is not managed with a particular investment environment in mind, as it is very difficult to accurately forecast the likely environment. Instead, the Trustee’s Selection is constructed with the aim of providing favourable returns over the long term, while being less sensitive to developments in listed equity markets than most superannuation funds. The lower sensitivity reflects a large allocation to alternative assets such as infrastructure investments and unlisted property. This allocation means that the Trustee’s Selection is likely to be less affected by the current weakness in listed equity markets than most superannuation funds.
Westscheme appreciates that this is a very difficult time for members. Westscheme will continue to monitor the situation closely and provide further updates as the situation evolves.
Howard Rosario
Chief Executive
Tuesday 14 October 2008
Previous articles from the Chief Executive are available via the links below:
Developments in the Financial Markets - Sept 2008
Westscheme's "Cash" investment option
Westscheme's Investment Strategy July 2008
Westscheme's approach to valuing its investments
Risks in current investment markets
How has super performed over the long-term?
Positioning of Westscheme in meeting the Challenges of Market Turmoil