Update No. 137 – 10/11/13

In Update No. 97 back in January of this year, I made this bold prediction:

The US and Chinese economies (the two most important in the world) will have a sound 2013 in my view, and given current valuations and the economic conditions in Australia, I would expect the Australian indices will on the balance of probabilities be likely to close 2013 with an above average year behind them.

It should be remembered that although the US recovery was relatively predictable, most pundits at the time were expecting a ‘hard-landing’ of some kind for China in 2013. Media outlets were forecasting collapses in Iron Ore prices and other commodities through 2013. I don’t know where they get their modelling, I was in China in January and the economy looked to be ticking along fine to me. So I always thought a hard landing scenario was unlikely. There is over-investment and inefficient investment in China as a consequence of a command economy, but if Europe stabilised (as I expected it would), China was likelier than not to stabilise also. It is easy to forget that 7% Chinese economic growth has roughly the same economic impact as 15% Chinese growth would have 10 years ago.

The year is now about 85% done, if we pinpoint the ‘average’ year for equities as being approximately a 9% gain, the fact that indices are up over 20% year to date would mean a very substantial fall would need to happen between now and December 31 for this prediction not to come true. Interesting point about the indices, watching the news tonight it was noted that the Australian market fell this week for the first time in 4 weeks. You’ll notice the ASX200TR index we use for comparison below rose by 0.38% this week. People are inclined forget what a powerful force dividends are in the high-yielding Australian equities markets…

My biggest current market concern at present is the lack of an obvious issue; benign periods are when unexpected shocks can cause the greatest dislocation. I will be keenly watching, but the global economy will probably be relatively stable for the next year or two. As we get into the second half of this decade, there is the very real prospect of inflation becoming a problem, I am hopeful that will create some opportunities. In any case, there are always individual businesses that will fall out of favour from time to time, even without major economic dislocations, so I am confident we will be able to keep your capital gainfully utilised even in the absence of global volatility that has been the hallmark of the last few years – Tony Hansen 10/11/13

EGP Fund No. 1 Pty Ltd. Up by 19.06%, leading the benchmark by 4.35% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 62.62%, leading the benchmark by 36.54% all-time (April 1^st 2011).

^{*1 after 31May 2013 dividend of 2.333 cents per share plus 1 cent per share Franking Credit}

^{*2 calculated based on dividends reinvested}