OPENING an envelope from your superannuation fund is usually a predictable and routine affair — unfold the statement, check your employer’s contributions, note the balance, and then file it away in the "financials" folder. But this year is different.
It is the first time many Australians will see a direct link between themselves, the sharemarket and all the reports about the credit crisis.
The enormity of the crash terrified everyone in the financial industry, so it is understandable that after seeing they actually lost money in superannuation last year, many Australians are reaching for the phone to call their fund and move money out of equities and into cash: out of ‘‘high growth’’ and into ‘‘capital guaranteed’’. But it is too late.
The damage has been done and the market has regained so much value since it hit its March low, brokers are calling it a FOMO market — fear-of-missing-out [on the rally].
In its worst moments, commentators described this as the biggest economic disaster in modern history — a crisis that could send the world into a deep depression. In fact, the Dow Jones industrial index fell further last year than in the Great Depression or the 1987 crash.
Globally, share markets lost $16 trillion in six-weeks as American investment bank Lehman Brothers collapsed, the US Government debated a $US250billion bail-out plan, and central banks around the world slashed interest rates.
The combined value of shares in the Australian Securities Exchange fell by $830 billion between December 2007 and November 2008. The market stopped falling at 3120 points on March 10 this year.
Since then, it has risen to 4596.1 points in a bear market rally that doesn’t seem to want to stop, even though market watchers keep predicting it soon will.
A year on from the events which pushed Australia’s sharemarket to a three-year low, a different atmosphere prevails.
But it will take a long time to get back to the dizzying peaks of 2007 when the S&P/ASX got over 6500 points. Share earnings may also remain low as companies retain profits to pay down debt or fund expansion.
And fund managers are now shunning complex debt and equity derivative products in favour of basic investments.
The corporate bond market is glowing with a new-found popularity due to the steady and safe income stream bonds offer, and the government bond market has woken with a fright after years of semi-hibernation.
The vital organs of the sharemarket are also improving; the number of companies floating on the exchange has been increasing steadily, volatility is down, and money is flowing into equities again.
While the market may suffer another big fall this year — an unpredictable corporate collapse could be lurking around the corner — the panic has drained from the market.
Analysts believe share prices have stabilised and the overwhelming message from the latest reporting season is that company profits will return by 2011.
Equity allocation strategy, the task of picking which stocks to buy and sell, is shifting from recession-resistant shares, such as health care and utilities companies, to sectors which do well in the economic good times, according to the head of investment strategy at Citigroup Australia, Graham Harman.
And the companies which have Australian-based operations have done quite well over the past few months, he said, while those that operate overseas will do well next year when global growth picks up.
Fund managers are sensibly cautious in their return to the sharemarket, but are acting differently: ‘‘There has been a new-found belief that if you do not understand [a financial product] maybe that is not because you are stupid ... maybe it is because it is not such a great idea after all,’’ Mr Harman said.
The latest report from the ASX shows average daily trading is 23 per cent higher than August last year, but the average value of each trade is down by 8per cent.
This is partly because $100 billion worth of new shares have been issued to raise capital over the past 12 months, diluting the value of existing shares, according to William Keenan, senior equity strategist at stock broking and research firm Lonsec Securities.
‘‘It will be hard for the market to keep moving up past the 5000 [index points] level without a good earnings recovery.
‘‘Share price-to-earnings ratios of 18-19 times, common in 2007 and 2008, may take many years to return. It is likely that 14-15 times will be the new norm,’’ Mr Keenan said.
Part of the problem was that companies were returning profits to shareholders through dividends and funding expansion and acquisitions with debt.
Now that debt is harder to get and interest rates for businesses are high, they will have to cut back on dividends and use the profits to fund company growth, Mr Keenan said.
Many companies borrowed so much for month-to-month operations that they came dangerously close to collapsing when the banks stopped lending, according to the chief executive of analysts Lincoln Indicators, Elio D’Amato.
‘‘It was not the economy which stopped overnight which caused all this, it was the fact of all these financial deals which eventually caused the economy to slow down,’’ he said.
Several high-profile collapses, such as Timbercorp, Allco Finance Group and ABC Learning, were caused by a sudden change in the flow of credit.
But the recent annual reporting season has given Mr D’Amato ‘‘immense confidence’’ that the Australian economy is strong, even if statistical indicators from the rest of the world are still weak.
Indeed, there were very few negative surprises in the annual reports, even in the US, which begs the question — was it really a crisis?
‘‘You need to remember that the financial analysts who were saying how bad things were, they were operating in the sector that got hit the hardest,’’ Mr D’Amato says.
The financial sector was hit so badly that governments temporarily banned short-selling on financial stocks in September 2008.
Short-selling allows investors to make money out of falling shares — they borrow shares and sell them, then buy them back at the lower price and return them to the owner, pocketing the difference between the high and the low price.
Regulators thought that short-selling was driving bank shares dangerously low and fuelling the panic.
Others argued it helped set the right price for a share, as no one would sell below the company’s true value, and kept money flowing through the market.
The ban was lifted once regulators felt the mood had stabilised, which, in Australia, was not until May 2009.
Short-selling in Australia has declined by about 50 per cent since the market crashed, according to one industry insider.
Although market volatility is down, it is still higher than in 2006. The difference between the overnight index swap (OIS) rate and the 90 day bank bill swap rate jumped to an unprecedented 140 basis points at the height of the crisis, when no one knew how many banks would collapse, compared with less than 10 basis points throughout 2006.
The difference between the target interest rate and the rate at which banks lend each other money rises as the risk of default increases.
Since dropping to 20 points in June, the difference between the two rates has risen to 34basis points, suggesting banks foresee risk returning to the finance sector.
Similarly, volatility is no longer at heart-attack inducing levels, but it is still higher than it was before the crisis.
The widely watched Chicago Board Options Exchange Volatility Index, which measures the implied future volatility of shares in America’s top 500 companies, jumped to an unprecedented 80 points during the credit crisis.
It has jumped before, such as after the 2001 September 11 attacks, when it hit 44 points, and normally floats in between 10 and 20 points. It is at 24.1 points today.
Despite these signs of risk, large companies are lining up to float on the stock exchange, something which only occurs when owners are confident of getting a good sale price.
Myer will lodge a prospectus for its initial public offering by September 28, and Energy Australia, Hanson Australia and Link Market Services are expected to announce floats in coming weeks.
No businesses went public on the ASX in November and December 2008, for fear no one would buy the shares, but $673.6 million worth of new shares have been sold since the start of this year. Some market watchers have suggested that the equities market cannot attract more money because of the sudden expansion of the debt market.
But the money that has gone into new corporate and banking bonds was buying mortgage-backed investments before the crash, not equities, according to the principal of ADCM services, Philip Bayley.
Demand for mortgage-backed investments evaporated last year after thousands of US home owners started defaulting on their loans. Lending money to home owners is usually the safest of investments, but it became one of the riskiest.
However, so far this year a record $70 billion worth of private-sector bonds have been sold in Australia, including $56.7billion from domestic banks, about $11 billion from foreign banks, and nearly $2 billion from private companies.
The banks have had to sell bonds, predominantly to superannuation and insurance funds, because they cannot borrow money from overseas lenders as easily.
And as with equities, investors are now looking for simple products in the debt market, not securitised or collateralised debt from a variety of sources with varying repayment risks, Mr Bayley said.
What happens next on the sharemarket depends on the strength of Australia’s economy and those of its trading partners.
The rest of this year will be rocky because market sentiment traditionally falls around September and October and governments are choosing whether to maintain stimulus packages or pull them back to avoid inflation.
It would be prudent to pay close attention to those annual letters from the superannuation fund.
