MLC Market Watch

Michelle Heinrich looks at the key factors driving recovery in the financial and economic markets.

 
Her analysis includes:

• the positive change in market sentiment and performance
• latest views on the cash vs shares debate, and
• the outlook for markets in the short, medium and long term.

View the Michelle Heinrich video here.

In this editorial, MLC CEO Steve Tucker talks about the dangers of moving investments out of the sharemarket and into cash products:

Late last year it was hard to avoid the media frenzy around the Federal Government’s guarantee on cash products and I observed the commentary with disbelief. The public debate was fixated on which companies would offer government-guaranteed products, which ones would pass on the cost of the guarantee to customers and whether or not customers could get access to the guarantee for free if they split their money among several different accounts.

However, no-one seemed to ask the most important question, which is: beyond bringing Australia into line with actions taken by governments around the world, what value was there for a customer with more than $1 million who would pay an additional 70 basis points for the guarantee on a low-risk, low-return cash product? The Government did not introduce the guarantee because it was worried about the stability or security of Australia’s banking system, which is strong and performing well. Cash products have operated effectively in Australia for decades and there is no reason why this would not continue. Unfortunately, these vital facts were missing from much of the public discussion around this issue, which seemed to be stuck at a product level rather than being focused on whether or not chasing the guarantee made sense.

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Given the current market downturn, it is understandable investors are worried about their investments. In response to this, the Australian Government recently announced it would guarantee the deposits of all Australian banks for three years.

They did this, despite Australian banks being secure and well regulated, to give Australians confidence their cash is protected and to prevent panic withdrawals.

This has however created some uncertainty for investors in superannuation, pension and investment products, with some considering moving out of these products and into bank accounts.

Such a strategy can be at the expense of investors’ long-term investment goals, as it can have two undesired effects:

• Investors that sell down their investments effectively crystallise their losses;
• Investors may miss out on the strong equity rebound in equity markets that have historically occurred after a period of poor market performance.

MLC’s Cash Fund guarantee

At MLC, we understand the importance of secure cash investments.

And while it is not widely known, we have in fact always guaranteed the MLC Cash Fund in our MLC MasterKey super and pension products*.

So we are taking this opportunity to confirm and strengthen our guarantee on the MLC Cash Fund.

From Wednesday 26 November 2008, MLC will be extending this guarantee to the MLC Cash Fund in our MLC MasterKey investment products^.
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In volatile markets, investors are often tempted to move their investments out of the sharemarket and into ’safe havens’ like cash.

Doing so can however have two undesired effects:

• Investors crystallise their losses. If an investor sells when the value of their investments is down, they will make a loss on their investment.
• There is also often a strong rebound in equity markets after a period of poor market performance, and an investor who has left the market would miss out on this.

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MLC recognises that investors choose to invest in MLC’s cash portfolios for their safety and low risk status.

Therefore MLC’s cash portfolios are focused on investing in assets with a high credit quality and high levels of liquidity.

Almost all the underlying securities in MLC’s cash portfolios are eligible for the proposed government guarantee of deposits.

MLC’s Cash Portfolios – October 2008 [PDF, 45KB]