MLC Market Watch

Industry commentators claim to be seeing signs of recovery, but is it too soon to be calling the end of this generation’s big bad bear?

 
In the May minutes of the Reserve Bank Board, several signs of a turnaround were noted including:

• signs that the rate of contraction in the US economy had slowed
• global equity markets rising sharply over the past two months
• improved conditions in global credit markets
• appreciation of the Australian dollar and emerging markets economies
• an increase in Australian business confidence
• domestic terms of trade still at historically high levels, with export volumes holding up better than expected
• signs the economic stimulus applied by the Rudd Government were supporting demand in the Australian economy, and
• signs the Australian economy was likely to record better outcomes than most other advanced economies in 2009 and 2010.

Based upon this, and other economic data, the Board decided against lowering interest rates.

So does all this mean that we’re officially out of the woods? The answer is, it seems, not yet.

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The global economic crisis (GFC) has wreaked havoc with Australia’s economy. We’ve seen GDP fall, unemployment rise, investments decline and a sombre mood take hold in the market.

There’s no guarantee that the worst is over yet, however several indictors are suggesting the rate of decline may be slowing and our economy may be starting to fight back.

Looking at the financial news in Australia, the general tone is ‘cautiously optimistic’. Some experts are predicting we’ve seen the worst of this recession and that recovery is imminent or may have even commenced. Others are predicting a long slow recovery. Which outcome is correct will depend in part on how and when the rest of the developed world, (particularly the US) resolves their significant debt and imbalance issues.

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While the Australian economy is holding up relatively well in the midst of a global downturn, investors are still bearing the brunt of the worldwide market turmoil.

With predictions of a global recession stretching well into 2010, and an assumption that Australia will not be immune, does this mean investors can expect more pain? The answer, it seems, is maybe not.

The world is in one of the most serious economic and financial crises since the 1930s depression. Economies have rapidly contracted, the world’s financial system is in disarray and unemployment queues are lengthening.

In response, governments across the globe are undertaking massive programmes to avoid a repeat of anything like the Great Depression. We’ve seen trillion dollar stimulus packages, government guarantees of banking deposits and lowered interest rates amongst a whole host of other measures in an attempt to stimulate the economy.

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Self-funded retirees who are invested in the sharemarket have arguably been the hardest hit by the global financial crisis.

Many may now be wondering if they should move their account-based pension into a more conservative investment portfolio, which contains less growth assets such as shares and property.

So we went back through history to see the impact that switching to a more conservative portfolio would have had, if done after a major market fall.

We also outline some strategies you could discuss with your financial adviser to help you weather the storm.

What is an account-based pension?

Before we reveal the lessons we can learn from history, we thought it was worthwhile going back to basics to explain how account-based pensions work.

An account-based pension enables you to invest your superannuation savings and receive a tax-effective income to help meet your living expenses.

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