recovery 09 .... four good reasons why

2009: Rebuilding confidence in the sharemarket
Without doubt 2009 is going to be a challenging year and the current levels of fear and uncertainty could mean that sharemarkets move even lower before they start to recover. However several initiatives have been put in place to restore confidence with investors and, over time, the problems of 2008 should be worked through.

There are four main factors that may help sharemarkets to begin to recover in 2009:

1) Sharemarkets can recover before economies do
Time and time again, history has shown that sharemarkets tend to recover over time, even when economies are at their slowest level. For example during the 1990s recession, the Australian sharemarket reached its lowest point in January 1991. This was two months before the recession actually started. By the time the recession was officially over in December 1991, the Australian sharemarket had risen by 29% from its lowest point.

2) Governments have been very responsive
Governments have acted swiftly to ensure the financial system does not collapse. Action is now being taken to support economic growth through government spending packages. As you can see from the table below, substantial government spending packages have been announced around the world. These actions are aimed at getting the global economy stabilised and creating a stimulus for growth, creating jobs, providing tax relief and building infrastructure.

Global government spending packages
Australia: AUD$10.4 billion – lump sum cash, housing
UK: £25.6 billion (AUD$60 billion) – cut to value added tax (VAT) and capital spending
US: US$150 billion (AUD$230 billion) – more likely to come
Europe: €200 billion (AUD$400 billion) – includes tax cuts
Italy: €80 billion (AUD$160 billion)
Germany: €50 billion (AUD$100 billion) - investment
Japan: ¥5 trillion (AUD$50 billion)
China: US$586 billion (AUD$900 billion) – housing and infrastructure
Russia: US$20 billion (AUD$30 billion) – tax cuts
Spain: €38 billion (AUD$58 billion) – tax cuts and rebates
3) Central banks have substantially reduced interest rates
Most central banks have cut interest rates substantially in the last few months. In Australia, the Reserve Bank has reduced rates from 7.25% (March 08) to 4.25% (December 08), and most analysts are expecting them to fall further in the near future. The US, the UK, Europe, Japan and China have also cut interest rates. These actions should eventually reduce mortgage repayment stress and encourage business investment.

Once share prices stabilise these interest rate cuts may also make the sharemarket more attractive to some investors if dividend yields (income) continue to pay a higher rate than cash and term deposits.

4) Shares prices are currently much lower than company profits
As you can see from the chart below, as at September 08 shares were trading at prices that assumed corporate profits would fall by more than 40%. History shows us that profits rarely fall by that much unless there is a severe downturn in the economy, as companies take measures to protect their earnings. Also, falling oil prices, interest rates, material costs and the weak Australian dollar should make Australian companies more competitive.