The key points are as follows:

• After strong gains shares were due for a correction. Worries about the Fed, Japan, China and the growth outlook in Australia have provided the trigger. 
• However, with Fed tightening fears overdone, the US economy on a sounder footing, Japan looking stronger, China likely to grow around 7.5% and the Australian economy to benefit from low interest rates and a lower $A, a re-run of the 15 to 20% falls seen around mid 2010 and mid 2011 are unlikely.
• Our cyclical view for shares remains positive, with further gains likely this year. We remain of the view that by year end the ASX 200 will end around 5250.

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The key points are as follows:

• The “risk on/risk off” pattern that has prevailed in investment markets since the global financial crisis (GFC) is showing signs of breaking down.
• This reflects reduced risks associated with the US and Europe and should be seen as a good sign.
• It means that individual assets and investments can go back to better reflecting their underlying fundamentals.
• It should also mean that the benefits of having a diversified portfolio should start to become more evident in the years ahead.

To read this edition of Oliver’s Insights, click here.

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The key points are as follows:

• The positives in the Budget are more for education, disability care & roads and savings in middle class welfare.
• However, the deficit is far worse than expected, with a surplus pushed out at least three years.
• While the Government has announced more budget savings their impact is zero for the year ahead.
• It’s hard to see major investment market implications flowing from the Budget, although the initial reaction in the currency market was negative.
• Australia’s public finances are benign compared to other advanced countries, but given the biggest resources boom in our history they should be far stronger.

To read this edition of Oliver’s Insights, click here.

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The key points are as follows:

• Four investment market realities: there is always a cycle; it’s a mad, mad, mad world; starting point valuations matter a lot for returns; and the power of compound interest.
• Keys to successful investing: know yourself; seek advice; invest for the long term; diversify; turn down the noise; avoid short termism; focus on investments offering sustainable cash flow; recognise there is no free lunch; buy low, sell high; don’t fret the small stuff; don’t over rely on experts; recognise the aim is to make money, not to be right; beware the crowd at extremes; and if you have the right strategy, never despair.

To read this edition of Oliver’s Insights, click here.

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The key points are as follows:

• China’s worries are overblown. Property tightening is likely to remain highly targeted and unlikely to threaten overall growth with aggressive monetary tightening unlikely.
• On the other hand, reflecting a desire for more sustainable growth there has not been enough stimulus to ensure a strong rebound. Rather, growth this year is likely to come in around 8%, similar to last year’s 7.8%.
• Chinese shares remain cheap. While periodic growth worries are likely to constrain returns they are nevertheless likely to be reasonable this year.

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• Concerns that quantitative easing will end in hyperinflation and economic mayhem are way overblown.
• Constrained demand for credit along with significant spare capacity suggests the risk of higher inflation is still several years away.
• However, the broader picture suggests that if the global recovery continues the risk in the years ahead will shift from disinflation and deflation to one of rising inflation.

To read this edition, click here.
 
Cyprus
Meanwhile, markets have shifted back to a very short term focus again with concerns about Cyprus. Here are some thoughts.
 
To be sure the decision to hit deposits in Cypriot banks sets a very bad precedent and violates a lesson from the 1930s that depositors should be protected. Equally the rejection of the depositor levy by Cyprus’ parliament raises the real risk that Cypriot banks will go bust resulting in even bigger losses for depositors.

Naturally investors globally are worried that this will lead one way or another to a return to the dim dark days of the Euro-zone financial crisis that we saw in 2011 and earlier last year.
 
There are two scenarios for Cyprus:

• First, it fails to come to an agreement with the Euro-zone regarding funding part of the bailout itself in which case it will not receive the proposed 10 billion euro in promised bailout funds and will likely see some banks collapse leading to even greater losses for depositors than would have occurred if the levy had proceeded. A sovereign default would also be likely in this scenario.
• Second, some sort of compromise involving all of the burden falling on large depositors and maybe other revenue raising measures, such as a more aggressive increase in the corporate tax rate beyond the proposed 12.5%, clearing the way for the bailout.
• The second scenario would seem a bit more likely, particularly as Cyrpriots start to contemplate the implications of a banking collapse. But there could still be much uncertainty until we even get to this point.

However, in assessing the broader implications for the Euro-zone from either the deposit tax or a potential collapse in Cypriot banks, the unique circumstances surrounding Cyprus cannot be ignored.

• At less than 0.25% of Euro-zone GDP and with a population of less than 1 million, Cyprus is literally a pimple on an elephant. Greek’s economy when it ran into trouble was 10 times bigger. Allowing Cyprus or its banks to go bust would have very little impact on the Euro-zone, providing any contagion (ie fears that the same will happen elsewhere) is contained.
• Its status as an offshore banking centre associated with money laundering and as a tax haven has led to an outsized banking sector with assets equal to 800% of Cyprus’ GDP compared to an EU average of 350%. More than 30% of its deposits come from outside the Euro-zone, particularly from Russia.
• The European Union has long sought to wind back Cyprus’ status as an offshore money centre for mainly Russian money.
• Cypriot bank recapitalisation requirements amount to a massive 80% of its GDP compared to 40% in Ireland, 27% in Greece, just 6.5% in Spain and zero in Italy.
• Its original request for a 17 billion euro bailout out would have seen its public debt to GDP ratio more than double from 86% of GDP to an unsustainable 180% of GDP from day 1.
• Reflecting all this, the rest of the Euro-zone felt that some of the burden for the bailout should be shared by large depositors in Cypriot banks, thinking Cyprus’s Government would only levy large depositors rather than ordinary Cypriots. It was the Government of Cyprus that tried to levy all depositors.

The unique nature of Cyprus’ banks and its small size indicates that it should not be seen as a precedent for other vulnerable countries in the Euro-zone. The Euro-zone has gone to extraordinary lengths via bailouts and other measures such as the ECB’s “whatever it takes” commitment to keep other countries solvent and remaining in the Euro.

Its very hard to see them letting this go to nothing because of Cyprus. Various Euro-zone officials, including German Finance Minister Wolfgang Schaeuble,  have clearly stated that Cyprus’ deposit  levy should not be seen as a precedent for other countries.
 
Given the unique circumstances of Cyprus and the efforts that have been put in place for other countries along with the fact that bank bailouts are already in place for Spain and Ireland the odds of a similar arrangement to that requested for Cyprus being forced on bank depositors in other countries is close to zero.
 
Of course in the very short term none of this will stop investors worrying about the implications of whatever happens in Cyprus for the Euro-zone. As a result share markets remain vulnerable to a further correction in the near term. However, as it becomes clear that Cyprus is unique and not a precedent for the rest of Europe (whether the bank levy or a collapse) investor nervousness is likely to recede.

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The key points are as follows:

• The December half profit reporting season was far better than feared and big cost controls have helped lay the ground work for stronger profit growth ahead.
• December quarter GDP growth of 0.6% was right on expectations and is the third quarter in a row of growth around a sub trend 2.5% annualised pace. Given the mining slowdown and soft growth elsewhere in the economy, GDP growth is likely to remain around this subdued pace over the next six months. 
• While interest rates may need to fall a bit further, green shoots of recovery are starting to emerge and suggest we are at or near the low for rates and more importantly point to an improvement in economic and profit growth on a 12 month horizon.
• While the share market has moved up ahead of profits this is not particularly unusual and price to earnings multiples are just around their long run average. We continue to see further gains in Australian shares over the year ahead.

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The key points are as follows:

• After being in a long term, or secular, bear market since March 2000 that has resulted in very poor returns for investors, global shares led by the US are likely at or close to entering a new secular bull market.
• However, returns are likely to be constrained relative to the last secular bull market, which started in the early 1980s, as valuations are not as attractive, the tailwinds from falling inflation and rising profit shares will be absent and global growth is likely to remain more constrained.
• Against this backdrop asset allocation will remain critically important, macro economic developments will remain a key driver of returns and it will remain important to focus on assets providing decent income flows and/or good growth potential such as commercial property, infrastructure, quality shares and emerging market assets.

To read this edition of Oliver’s Insights, click here.

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The key points are as follows:

• An inconclusive election in Italy, which has put a cloud over whether it will continue with economic reforms, has seen the return of worries regarding the Euro-zone.
• Uncertainty is likely to linger for several weeks, but as we have seen in recent times in Europe there is a danger of overreacting as blow ups have tended to settle down without the feared collapse of the Euro.
• Our assessment is that while the correction in share markets may have a bit further to go, not helped by Italy, the broad rising trend in markets will likely continue.

To read this edition of Oliver’s Insights, please click here.

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• Sovereign bonds have had a great run, but with yields near record lows and global growth improving this is unlikely to continue.
• A 1994 style bond crash is a risk, but unlikely at this stage as it’s hard to see monetary tightening this year. The most likely scenario is a gradual grind higher in bond yields. This could still see bonds return zero this year.
• Very low bond yields highlight the need for active fixed income management where the portfolio manager can increase the exposure to less vulnerable credit and reduce a portfolio’s duration to limit the impact of a rise in bond yields.

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