Australia’s GFC fall was less severe than most and its recovery has been more tangible, but markets still require skill and a finger on the pulse, writes Alan Shields.
Your pulse is one of the most important indicators of your health. First and foremost, it reveals that you are alive — that your heart is pumping blood through your veins, and that your body’s systems are in working order.
Secondly, and perhaps more usefully, it shows how your body responds in certain situations, such as when exercising or afraid. When you go for a run, the pulse increases so that muscles can get more oxygen, burn more energy and perform better.
When you get a fright, the pulse increases so that you can run away quickly if need be. If you’re fit, the pulse is generally lower than that of an unfit person and responds better to stress.
So if you’re working out, it makes sense to monitor your pulse, so you can tell how tuned your body is and whether your exercise is paying off.
That’s why “keeping a finger on the pulse” is such an apt metaphor when it comes to market activity. By constantly monitoring the rises and falls of the market, investors can tell whether their investments will pay off or whether they need to alter their investment strategy.
Observant investors know where to put their money because they know the market: they know its ups and downs and they can accurately judge its performance. They know the signs of a healthy growth market and they can act early when they see danger ahead.
The last few years have been tumultuous for financial markets. The recovery from the Global Financial Crisis (GFC) has slowed or stalled in many developed nations. Australia has been the exception to the rule in some respects, since its GFC fall was less severe and its recovery has been more tangible.
But exposure to investment markets in this country has still required skill and observation – a finger on the pulse, if you will. At RFi, we have measured private banking clients’ willingness to invest in certain asset types over the past three years and found that private banking clients do, in fact, have their fingers on the pulse of the Australian market.
In March 2009, when RFi began to measure private banking clients’ willingness to invest, the Australian stock market was in recovery mode.
As the ASX All Ordinaries index rose between March and September 2009, so did private banking clients’ willingness to invest in Australian shares. Likewise, the plateau in the All Ords between September 2009 and March 2010 led to a relatively stable willingness to invest. And again, when the stock market fell between March 2010 and September 2010, private banking clients began to find it less attractive.
Then came 2011 which, with the benefit of hindsight, can be best described as a disaster and a crisis. Private banking clients, with their fingers on the pulse, felt that all was not well. Despite the stock market’s growth to a post-GFC high in March 2011, private banking clients were no longer willing to invest in shares.
They listened, not to the rhythm of growth, but to the underlying rumble of instability. When the stock market fell between March and September 2011 to its lowest level since 2009, private banking clients’ judgments of the market proved accurate.
And, with their inclination to invest in shares in September 2011 close to GFC levels, it would seem they expect 2012 to be another challenging year for the stock market.
When private banking clients perceived that the stock market’s performance was going to be undermined by unrest, the reliable returns of cash investments became an appealing proposition. Australia’s official cash rate at the time was 4.75 per cent, and while this was lower than the returns that could often be gained from shares, it was higher than the cash rates in developed countries and relatively stable.
Thus, private banking clients’ willingness to invest in cash jumped at the beginning of 2011 and by September 2011 it was only marginally below their willingness to invest in Australian shares.
With their fingers on the pulse of the Australian market, private banking clients were able to spot the warning signs early in 2011. They were able to act to protect their returns because, though signs on the surface pointed to growth, the market’s pulse indicated an underlying instability and told of a difficult year ahead.
Only time will tell whether 2012 will prove to be as challenging as 2011, and whether the world will again feel the bite of volatility and unrest. But one thing seems certain – Australia’s private banking clients will be closely monitoring the health of the markets.
Alan Shields is a director at RFi, a provider of specialised strategic research, market intelligence and advisory services to financial services institutions.
