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The Year Now Gone, And The Year To Come

Tom Elliott

From a business perspective, Australia was a great place to be during 2010. Thanks in part to continued growth in China, our economy stayed strong. Because of this, unemployment hovered near record lows. And although thanks to the cautiousness of the Reserve Bank, interest rates rose, they’re not yet at the level likely to cause large scale mortgage stress for households. The only real negative from an investment viewpoint was that the overall stockmarket failed to repeat the massive turnaround it achieved in 2009 after shareprices bottomed out in March of that year.

Despite these positives, plenty of events that took place during 2010 served to remind us that financial risks still abound. The public debt situations in both Western Europe and the USA remain diabolical as governments struggle to reign in budget deficits grown massive as a result of desperate spending during the Global Financial Crisis of 2008/09. Interestingly, different economic theories about how best to deal with this situation are being trialled, with Britain’s new government embracing a programme of public austerity, while President Obama’s administration takes the contrasting approach of more spending combined with substantial money printing. Only time will tell who’s correct, although the USA is surely taking the greater gamble with both its currency and its economy.

The Eurozone also faces the very real threat of Germany walking away from the combined currency and relaunching its beloved Deutschmark, such is the anger erupting from German taxpayers being asked to fund the bailouts of places like Ireland, Spain, Portugal and Greece. Creating the Euro without enforcing political union was always a gigantic experiment, and one now facing the very real risk of failure.

Looking forward to 2011, Australian investors have much about which to feel positive. There is little sign that commodity prices will slacken off in the short term, although this dark possibility should always be present in the minds of shareholders in Rio Tinto, BHP, Fortescue Metals, and so on. With respect to interest rates, it’s my personal view that these will rise no more than another 50 basis points over the course of the coming year, and then possibly decline a little. And as to the Australian Dollar, having seen it fall 35% in just four months back in mid-to-late 2008, I wouldn’t bet on it staying high forever. This suggests that those contemplating a big overseas trip should do so sooner rather than later.

In between bouts of gluttony and good cheer, Christmas is viewed by many as a time of reflection. From an investment perspective, I feel that stockmarket profits should be taken where and when they appear, as equity prices will probably display considerable volatility in the year ahead. And if I were to sit on Santa’s knee at the local Westfield Shoppingtown, my wishlist would include the following:

  1. An end to the war in Afghanistan;
  2. Politicians who tell the truth; and
  3. Resolution on the carbon tax debate so that business can plan for the future.

Perhaps instead I should stick with something simple, like asking for a book I actually enjoy reading from beginning to end…

Tom Elliott is the Managing Director and a co-founder of Melbourne-based hedge fund, MM and E Capital Pty Ltd

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