Dec 19

A few too many ‘China Hard Landing’ stories for my comfort

I’ve read a few too many times how Australia is well positioned because of its exporting links to China and how this should help us escape any serious economic issues flowing out of Europe. Obviously our markets haven’t quite agreed with that with bond yields dropping massively over recent months and our equity market continuing to show high volatility and dropping arond 20% since recording 2011 highs around 5000 back in April.

Overnight we have just had three articles from prominent economists indicating concerns about China …

Of course, a seriously troubling Euro crisis will spill over everywhere including China. Our economy is nowhere near as secure as many commentators or fund managers indicate and I have to admit to being the most bearish on our economy for quite some time…my perceived complacency and frustration with government and opposition focusing on budget surpluses is driving me nuts.

For investors, finding good investment return potential is very difficult indeed and takes some courage. Equity markets still carry plenty of downside risk let alone the usual day to day volatility, bonds have yields in the 3%s, and with an economy looking to slow more than we hoped, property looks scary, and even commodities are bound to drop signficantly in the face of a slower China.

I’m sure the focus of investors will continue to be capital protection over capital apreciation for some time yet. So I can only imagine that cash and term deposits will continue to be the investment of choice…particularly whilst term deposits continue to pay 1.5% to 2% over government debt. Personally, I believe if you can handle the volatility and hang in there for a while I tend to think corporate debt, which on average is paying a significant premium above governemnt debt, should provide the best return potential…only record default levels should stop a decent return on corporate debt (not that its out of the realm of possibility) in the next few years so ensure the portfolio is well diversified and be prepared for a bumpy ride.

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