Interest Rate Bulletin

Statement by Glenn Stevens, Governor: Monetary Policy Decision

Seasons Greetings

John Robertson

Editorial

New Website Launched

We are proud to announce the launch of our new Bridgewater AFS Website. It contains a great deal of Investment and Financial Planning information.

We trust you will find of interest and of assistance in planning your financial future. Please feel free to log on to the site on a regular basis for updates and news articles at www.bridgewaterafs.com.au

Seeing Your Financial Adviser

John will be visiting the Cairns and Townville region during the third week of November. If you're in the area and would like to catch up please call the office and we will make an appointment.

Finally, we would like to remind those self-managed superannuation funds we administer to keep sending in your statements. This will enable Asavia Super Solutions to keep your records up to date and compliant.

Beth Perkins

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We are all aware of the fact that the population of much of the world is ageing. This has come about due to the fact that the mortality rate has fallen significantly, life expectancy has increased markedly and the birth rate has fallen dramatically.

As a result, Baby Boomers now represent more than 20% of Australia's population. They account for approximately 25% of all spending, more than a quarter of all consumption, virtually 40% of all total wealth and well over half of all financial assets.

Several milestones regarding the Baby Boomers are rapidly are approaching. In 2012 large numbers of this group will attain the age of 65. As a result, from that year, the proportion of people over 65 will grow much faster than the rest of society. In some parts of Europe such milestones have already been reached. In Germany for example there are already more people aged over 65 than there are aged below 16. That will occur in Australia sometime around 2020.

Back in 1950, the average male who retired at 65 could expect to live around 10 - 12 years in retirement, the average woman, perhaps 14 years. Today the average male is likely to face 18 - 20 years and the woman even longer.

Whilst it is a combination of these factors that has led to this situation, the single most important factor in determining future population is the total fertility rate (TFR). The TFR is the average number of babies born to women during their reproductive years. A TFR of 2.1 is considered the replacement rate; as once a TFR of a population reaches 2.1 the population will remain stable. When the TFR is greater than 2.1 a population will increase and when it is less than 2.1 a population will slowly but surely decline.

Australia's fertility birthrate is currently less than 1.8, in Europe it is below 1.6 with the lowest rate in the Ukraine at less than 1.2. However, Australia's population is still growing as immigration is having a significant impact and without it our population would be shrinking. The following illustrates this perfectly:

I found an article under the banner "Japan fertility hits record low". The article went on to explain that "Japan's fertility rate has sunk to a record low. The rate was 1.25 in 2005, down from 1.29 in 2004". Not only that, the 2005 rate was the lowest since the government began keeping records in 1947. As a result, Japan is likely to see its population shrink by up to 25% between now and 2050.

The other piece of news I found was in stark contrast and was under the banner, "Fertility rate at 26-year high". The article went on to explain that the fertility rate in the UK has hit its highest level since 1980 as more women in their late 30s and 40s have babies. The figures revealed women in the UK are having 1.87 children on average, up from 1.8 in 2005. Not only that the fertility rate in England and Wales has been rising since the all-time low in 2001 of 1.63 following an almost continuous fall since the late 1980s.

However, as you will notice, it is still below the replacement rate and what's more, experts predicted it was unlikely to keep rising as the upturn has been largely driven by increasing birth rates among older women. The highest percentage increase for any age group was for women from 35 to 39 which rose by 7% in a year. Fertility rates have also doubled for women aged 40 and over in the last 20 years.
So, not such good news after all.

Which brings me back to my title for this piece. No one should be surprised to discover that when there are prolonged power cuts, the birth rate tends to rise.....

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Chinese investors are proving less reliable than we had anticipated. The presence of Chinese investors has breathed life into the Australian stock market during 2009, raised resource sector stock prices and maintained the flow of wealth which has kept the Australian economy aloft while other countries lurched into recession. In short, Chinese interests have played an important role in sustaining Australia's economic well being.

Chinese activity in the past year has been the culmination of their experiences in the prior eight or ten years. Chinese state owned enterprises had been prowling the world to access industrial raw materials for their factories and public infrastructure. Iron ore, copper and other base metals have been high on the list of targeted purchases. As their industrial needs continued to grow and new supplies were less readily available, Chinese buyers reassessed their strategies. They began to invest directly to secure the supplies that they would need.

In recent months, it seemed that any Australian mining group worthy of its place in the industry has been lining up a Chinese partner. At a time when capital markets had lost all enthusiasm for risk, the Chinese were an (albeit atheistic) godsend. They had capital, the lifeblood of the resources industry, and the encouragement of an autocratic government.

From global giant Rio Tinto to up and comer Fortescue and mining minnow Terramin the Chinese were there setting the price and making the difference between commercial success and failure. In the past few days, however, the ardour has seemed to dim. Fortescue announced that it could not finalise terms with its Chinese associate within the previously set deadline. Platinum Australia gave up and raised the capital it had been promised from local institutions rather than its reluctant Chinese partner. Lynas Corporation had to tap traditional investors in a deeply discounted $450 million raising after its Chinese benefactor backed out of their deal rather than limit its stake to 50% rather than 51%.

It is possible to read too much into these events. There are more deals going ahead than being cancelled. Nonetheless, to understand the risks attaching to this important source of national funding, we should ask some questions about what is happening behind the scenes.

• Is there someone in Beijing with his hand on the capital spigot turning it off in response to instructions?
• Have the Chinese authorities realised that the strategic urgency which had been driving their purchases is unnecessary?
• Have short term needs been reappraised in response to weaker global market conditions and rebuilding raw material inventories?
• Did some Chinese investors always retain the option of withdrawing from the deals because, quite simply, their understanding of a contractual obligation differs sharply from that among Australian businessmen?
• Are the Chinese miffed at how reluctantly parts of the Australian community have embraced their presence in the resources industry?
• Have Chinese authorities decided that Australian companies should be downgraded as investment targets in favour of companies operating in more friendly jurisdictions?

Even with these few examples of deals falling over on which to draw, Australian companies should already be more circumspect about their interactions with Chinese interests.

Until now, many Australian companies have had a choice between a Chinese strategic investor focused on accessing long-term output and less concerned about share prices than others, on the one hand, and a broker pushing for a 15-20% discount to make a share placement, on the other. The choice had once seemed clear-cut but is now more ambiguous.

Until the Chinese money is in a bank and counted, companies will need to be more prepared to go with the broker to reduce the risk of ending up with nothing despite the potentially dilutive impact on existing shareholders. This could create additional equity supply for local institutions and individuals but, in doing so, place some downward pressure on equity prices.

A few examples of the Chinese themselves being rebuffed may emphasize to them that they need to become more circumspect in using their own economic clout. Alternatively, they might simply go somewhere else.

At its meeting today, the Board decided to raise the cash rate by 25 basis points to 3.5 per cent, effective 4 November 2009.

Statement by Glenn Stevens, Governor Monetary Policy RBA

The global economy has resumed growth. With economic policy settings likely to remain expansionary for some time, the recovery is likely to continue during 2010 and forecasts have been revised higher. The expansion is generally expected to be modest in the major countries, due to the continuing legacy of the financial crisis. Prospects for Australia's Asian trading partners appear to be noticeably better. Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets. For Australia's trading partner group, growth in 2010 is likely to be close to trend.

Sentiment in global financial markets is much better than earlier in the year. Nonetheless, the state of balance sheets in some major countries remains a potential constraint on their expansion.
Economic conditions in Australia have been stronger than expected and measures of confidence have recovered. Some spending has probably been brought forward by the various policy initiatives. With those effects now diminishing, these areas of demand may soften somewhat. Some types of capital spending are likely to be held back for a while by financing constraints, but it now appears that private investment will not be as weak as earlier expected. Medium-term prospects for investment appear, moreover, to be strengthening. Higher dwelling activity and public infrastructure spending are also starting to provide more support to spending. There have been some early signs of an improvement in labour market conditions. The rate of unemployment is now likely to peak at a considerably lower level than earlier expected.

Inflation has been declining for the past year. In underlying terms, inflation should continue to moderate in the near term, but now will probably not fall as far as earlier thought. Headline CPI inflation on a year-ended basis has been unusually low because of temporary factors, and will probably rise somewhat over the coming year. Both CPI and underlying inflation are expected to be consistent with the target in 2010.

Housing credit growth has been solid and dwelling prices have risen appreciably this year. Business borrowing has been declining as companies have sought to reduce leverage in an environment of tighter lending standards. For many business borrowers, increases in risk margins are still coming through. The decline in credit has been concentrated among large firms, which have had good access to equity capital and, more recently, to debt markets. Share markets have recovered significant ground.

The Board noted that the rise in the exchange rate is likely to constrain output in the tradeables sector and dampen price pressures. Nonetheless, growth is likely to be close to trend over the year ahead and inflation close to target. With the risk of serious economic contraction in Australia now having passed, the Board's view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. The adjustments at the October and November meetings will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.

It has been full steam ahead here at Bridgewater AFS. The past month has seen John, our financial adviser going out and visiting many of you. He’s a busy lad, but I have it on good authority that he enjoys looking after his clients. In addition, we are in the process of expanding our service offering by taking full advantage of Jonathan’s specialty in direct shares. Finally, I have joined Bridgewater AFS to fill the position of associate adviser. I bring to the team my passion for finance and educating clients in financial management. I look forward to establishing a working relationship with you to assist you in meeting your financial goals.

In the meantime, sit back, enjoy, and learn from the selection of articles I’ll present to you each month.

Beth Perkins



The Perils of Being Stressed
Stress can negatively impact on our bodies a lot more than we could ever imagine.

Everyone gets stressed at some point in their lives and sometimes we can use it to push us to greater effort. But continued stress or an inability to cope with it can severely damage your health.
In Japan there is a recognised occupational disease called "karoshi" – literally meaning death from overwork. But stress can come from other sources apart from work including troublesome teenagers, lack of control over money, broken marriages, and not enough time to get everything done.

Stress damages the immune system so your defences are low and you are more likely to pick up infections. And the problem may become self-perpetuating because illness itself is stressful.
Long-term stress can lead to life-threatening conditions like cancer, heart disease and strokes, as well as depression and other mental disorders.

Positive responses
Conventional medicine has seen illness and injury as externally inflicted – something or someone else is the cause.

Alternative therapists usually get better results by proving that stress-related illnesses such as chronic headaches, acid reflux or eczema, come from within and the whole person is treated instead of the illness.

There is no one magic solution but just as the problems arise from within, they can be solved in the same way. Experts suggest a good start is eating properly, getting regular exercise and rest.

Making changes in your life is crucial. Learn to prioritise. Does it really matter if everything doesn't get done? What actions are going to have a long-term effect? Learn to forgive others or be open with your concerns. Carrying a grudge is a stressful and pointless burden – the only one who suffers is you. Take a break, learn to relax and laugh more.

Most importantly, take action on the worrisome issues in your life. For instance, if you're losing sleep over a money problem, take action to control it rather than letting it control you. Have a chat to a financial adviser and ask for solutions. Once you've got your finances in order, you'll feel the stress drop away!


History & Bear Markets
Lester Wills


Bear markets are not actually uncommon, one can even argue they an unavoidable, if unwelcome, aspect of investing.

Many will be surprised to know that in the US, there have been nine bear markets since 1950, not including the one that began in October 2007. They lasted an average of 13 months but have ranged anywhere from 101 days to more than 600 days.

That begs the question, what actually is a bear market? (Apart from one that seems to have gone down a lot). The common definition is a market decline of 20% in share prices from a previous high point. In the US this is usually measured by the movement in the S&P 500 index. So, defining what a bear market is actually not difficult, but stating when it stops is another thing because the end of a bear market cannot really be determined until a new bull market has been identified.

This of course begs the question, what is the definition of a bull market? A bull market is commonly defined as a 20% increase in prices from the beginning of the most recent bear market. Notice, that this definition does not use the lowest point reached in the bear slide, but rather refers to the beginning of the bear market.

Whilst bear markets can be painful for investors it is important they maintain perspective. By looking at the characteristics of previous bear markets and the recoveries that followed, it may enable people to not only keep current market conditions in perspective, but to also avoid emotional decision-making that could potentially be very harmful (how many people have fallen into the classic trap of buy high and sell low?).

Sizing Up This Bear
Many will recall my words that investment markets are dynamic. In this regard each bear market seems to have its own personality, stemming from a unique set of root causes. The current slide, beginning in October 2007 may differ from previous ones because of systemic uncertainty caused by a broader credit crisis. The simplistic version of the cause is that the credit markets seized up after some subprime loans that were repackaged and sold to investors began to default. This in turn led the credit markets to dry up, which then imperiled businesses that need to borrow money to finance their operations.

But of course, things are never simple. The most recent run of the bear has it’s own unique set of circumstances, such as the unprecedented steps taken by the Bush administration to aid the private sector during the credit crisis, the uncertainties created by a closely watched presidential race, and the approaching expiration dates of several favorable tax laws, and it's easy to see that bear markets can be caused, prolonged, or otherwise influenced by a range of real-world events.

Ready for the Bear's Bounce?
Sadly it is not possible to forecast exactly when this bear market will end, but, if history is any guide, share prices will move upward again. It is a question of when, not if.

What many do not realize is that considering this recent bear market began in October 2007, this upward move could be sooner rather than later. Moreover, past performance suggests that investors may eventually benefit from a post-bear bounce that could possibly be significant.

As difficult as it is to continue investing regularly in shares in the midst of a bear market, as any serious investor knows, there are compelling reasons to do just that. Share prices have historically offered the best chance for returns that will beat inflation over the long term. Furthermore, many successful investors know that when shares are out of favour, it can be a good time to buy. When prices are down, it is possible to accumulate more shares at a lower cost (who mentioned Dollar Cost Averaging?).

Edited by Beth Perkins