Thursday 25 December 2008

Season's Greetings

Merry Christmas to all readers of EnoughWealth!

After a slow start, Christmas trading in Australia appears to have picked up considerably in the last few days - apparently the Government's economic stimulus package is being spent. It will be interesting to see if we avoid a recession in Australia during this global slow-down. The hefty interest rate cuts this year may restrict the drop in Australian residential real estate prices to the 10-15% already experienced (although QLD and WA will probably continue to decline given the effect of the plunge in commodity prices on the mining sector in those states and their relatively high price ratios compared to historic ratios to NSW and VIC). On the other hand, home affordability is still very low at the current prices, and although there is currently undersupply of new housing compared to demand, the increased unemployment rate over the next year may cause the government to reduce immigration levels, which will lessen demand for housing in the medium term. Falling real estate prices have accounted for around $100K of the $500K drop in my net worth this year, so my financial progress in 2009 will be significantly affected by how Sydney real estate performs. My asset allocation is now even more overweight in real estate compared to this time last year, due to the plunge in equity markets.

It is impossible to know where the stock market will end up in twelve month's time - after all, this time last year many "experts" were still expecting the US sub-prime financial crises to not impact the global economy, or even have much impact on the US "real" economy. And I was silly enough to let my Index put options expire without taking the time and effort to replace them. However, with markets down around 45%, it feels close to the bottom (although it seemed similar back in March, when the market plunge paused after a fall of 25-30%, the "normal" bear market decline), and the Australian stock market could stage a rapid recovery (although not to 2006-7 boom levels) if our economy does manage to dodge a recession. After all, GDP is a lot higher than it was 5-6 years ago, so stock prices are relatively cheap if GDP holds up and company profit margins can recover - especially with interest rates continuing to drop to the lowest levels for a long while.

Hoping for a Happy New Year in 2009!

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