The Ark Informer – November 2010 An Economic Update

In this Ark Informer “Where to Now?”, we give an update on interest rates, an international snapshot, the rising australian dollar, inflation and our view of where the market is heading.
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There is also an excellent whitepaper written by Russell Investments and the ASX analysing asset classes over the past 10 and 20 years.

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The Ark Informer – November 2010

An Economic Update

The United States, Europe and Japan are struggling to support a
sustained recovery, Emerging Asian economies are motoring along, supported by
domestic demand. The Australian economy seems to be riding the Asian wave!

Interest Rates

In Australia, as we all know, the RBA were sneaky on announcing an increase to the official cash rate from 4.5% to 4.75% on Melbourne Cup day, thinking that we would not
notice. We wait to see how the lenders respond. We have already seen the Commonwealth Bank increase rates by 0.45%, almost double the RBA increase. We
expect lenders to start to announce their positions in the next few days.

With interest rates at less than 1% in USA and Europe – governments are doing all in
their power to stimulate the economy.

Australia – Interest rates are 4.75% and forecast to rise (see graph below). The Australian Dollar strengthening as high interest rates are attracting overseas



  • Interest rates are .25%, and the only tool left in the Federal Reserves belt is to stimulate the economy is to print more money. No matter how low interest rates are this will not help families with negative equity and no jobs
  • The outlook for the US economy remains bleak, and deflation concerns are still present. However, financial market performance will be effected by any further decisions surrounding more quantitative easing in the near future

But – one should invest in times of despondency!
See the Emotional Investment – Rollercoaster


  • Interest rates remain at all time lows of 1% in Europe and 0.5% in the UK
  • The share market remains volatile in response to mixed recovery signals
  • Germany and France experiencing a relatively strong resurgence, while other nations suffer from persistently high unemployment


  • China is a major driver of this growth with GDP growing 10.3% over the year during the second quarter, compared to 11.9% in the first quarter. This provides a sustainable growth story, as inflation is well contained
  • India has also experienced vigorous growth with leading indicators such as business and consumer confidence,  as well as the production manufacturing index continuing to rise. Growth is projected at 9.7% in 2010 and 8.4% in 2011 according to the IMF
  • The likes of Singapore, Korea and Taiwan are also showing double digit growth


  • The Reserve Bank of Australia (RBA) has raised interest rates seven times between October 2009 and November 2010 
  • The Australian economy is showing steady growth, with a strong reliance on the resource sector
  • There’s a lot of planned investment over the coming year but business is not putting that into play at the moment Investment, consumption, employment and confidence improving across most sectors 
  • The IMF forecasts economic expansion of 3% this year and 3.5% in 2011

Australia and the Resources Sector

  • China’s insatiable need for our resources has boosted terms of trade, leading to wage growth and rising employment
  • Overseas investors are looking to Australia for an exposure to China Market, 40% of our market is owned by foreign investors and they will be looking to invest here to get access to the Chinese growth story 
  • Huge disparity between
    the 2 economies 
    • wage growth in the mining sector has boomed, with the average wage being $103,000, the average wage across Australia is
      $62,000 pa
    • In the last financial year, company profits across Australia
      were up 18%. Strip out the mining sector and profits were only up 3%

The Rising Aussie Dollar

  • Its highest level since the currency was floated in 1983
  • Vacancy rates which are very, very low here — 2 to 3%, whereas in the US you’ve got 15% vacancy rates
  • Unemployment is going south and that means sub 5% – USA 10%
  • Government net debt levels of around 5% of GDP, compared with over 68% in the UK and 65% in the US
  • The Aussie Dollar could move beyond parity in the next 6–12 months as further quantitative easing looks likely in the US
  • A high Aussie Dollar is positive for Australian consumers (who will see the cost of goods fall), as well as for airlines and retailers, but not good for the tourism sector,
    manufacturing and exporters


  • Growth prospects in the Asian region and a booming commodity sector has a risk of causing inflation
  • The RBA has kept a lid on inflation by steadily increasing interest rates
  • Housing affordability and consumer spending needs to remain robust
  • 200,000 first home buyers may not be able to pay their mortgages if rates increase!

There needs to be a careful balance of managing interest rates and inflation
The Market
‘The Australian market has been trading in a pretty tight band from 4300 to about 4600–4700.
Are we ready for a rally?

  • Economy – good
  • A relative bond yield  -good
  • Dividend yields –good
  • Employment – good
  • Solid corporate profits and above average equity yields that are currently averaging 5 – 5.5% fully franked make shares good income generators.

We believe it is possible that the market will hit 5,000 by March 2011 and 5500 by Dec 2011.
What should you be doing now?

We believe that adopting a process of investing into the market on a regular basis is a sound strategy,Once you have a financial strategy in place, regularly review it, but don’t deviate from a sound plan. 

 For a free Financial Health Check, please don’t hesitate to contact us

 graphs and tables sourced from ANZ

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