HEWISON Financial news, our views AND other issues Issue 38 ~ January 2012
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uarterly • Chris Morcom makes the • Economic update Master Class • From the CEO’s Desk • New Appointment • The golden rules of investment • HPW appointed “FPA • Investment focus Professional Practice”
Understanding the terms we use PE Ratio Or Price to Earnings Ratio. The number of times a company’s earnings per share is covered by the share price. It is commonly used to measure how attractive a share is to investors. The lower the ratio relative to the average of the sharemarket, the lower the (market’s) profit growth expectations. Calculated by: Market price of shares / Earnings per Share = P/E Ratio. Return on Equity (ROE) In analysing shares as investments, return on equity is calculated to show the return the company has made for shareholders on their investment. Shareholders’ equity normally excludes intangible assets such as goodwill, and is calculated by deducting total liabilities and intangibles from total assets. Payout Ratio The percentage of earnings paid to shareholders in dividends. Volatility The fluctuation at which share prices move up and down. It also means the possibility of a short term change in the value of an investment, positive or negative, due to market fluctuations. Volatility does not mean a loss or gain of capital. Two Speed Economy A term used to describe disparity between the performance of mining-related sectors and the states where these are concentrated, while the rest of the country is being impacted by lower performance due to factors such as a decline in manufacturing and record fuel prices.
Economic update Story by Simon Curtain DIRECTOR/PRIVATE CLIENT ADVISER
While 2011 was meant to be a year of consolidating growth, it instead turned out to be a year of disasters, both natural and financial. Disasters in New Zealand, Japan’s earthquake, tsunami and nuclear meltdown, Middle East and North Africa uprisings, the US Debt Ceiling and the European Debt Crisis negatively affected markets here and around the world. In Australia, economic growth was hampered by the January floods, and cautious household spending resulted in a weaker retail industry. While the housing market slumped, the mining boom continued strongly, lending credence to Australia’s two-speed economy. The Reserve Bank of Australia cut interest rates twice in a bid to improve the economy and partly in response to Global economic threats, mainly from Europe.
So what is the outlook for 2012? We expect that Europe will continue to dominate the headlines, at least for the first half of the year, as they try and find a solution to the Debt Crisis. While there is no silver bullet to end the Crisis, if European leaders can get their act together and hash out a viable course of action then world markets can turn their attention elsewhere and leave Europe to slowly rebuild and consolidate over the coming years.
Image by Griszka Niewiadomski
In the US, we think that the US Economy will continue to plod along. Unemployment is currently 8.6 per cent but the downward trend in jobless claims is encouraging. While there may be concerns of a double-dip recession in the latter half of the year, strong signals from the corporate sector should keep US growth positive. We do not expect too many policy changes to come out of the US this year as President Barack Obama will not want to rock the boat with Presidential elections due in November. China experienced a slowdown in 2011 as its largest trading partners; consumers in the US and Europe, slowed spending in response to local economic factors. The Chinese Government is intent on protecting growth and has a number of policy measures at its disposal (e.g. easing interest rates) to keep inflation under control and growth steady over 2012. In Australia, fundamentally speaking, our economy is in great shape but, as always, external factors will continue to weigh on the market. We expect the Reserve Bank to keep a close eye on economic growth and to cut interest rates if growth looks to be slowing, even if this results in a rise in inflation over the shorter term.