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Same story keeps investors wary

Markets are still reacting with uncertainty to new Government measures

After resolution of the US Federal Government debt ceiling at the 11^th hour, markets continued to fret about the health of the US economy and whether a double-dip back into recession could be avoided.  Global economy growth concerns became elevated, also from rising concerns in Europe, where market volatility escalated amid heightened worries about sovereign debt.

The European Central Bank (ECB) entered the market to buy and support Italian and Spanish bonds, a move that provided at least for a time some measure of stability to those markets.  The ECB also said that they would provide unlimited liquidity funds to member banks for the next six months. Italy and Spain both announced further budget austerity packages to accelerate deficit reduction. Germany's Chancellor Merkel and French president Sarkozy announced mid-month that there would be no Eurobonds issued, also suggesting a "golden rule" that would force Euro governments to balance their budgets. 

We see this a positive long term step in bringing stability back to Europe whilst putting measures in place to unwind and pay off the sovereign debt over time, but this will curtail GDP growth as austerity programs reduce spending capabilities.  The low Euro will assist countries to maintain strong export potential to offset some of the reduced domestic spending.

In Australia, the domestic economy revealed further signs of weakness through mid-year while the commodity-resources side of the economy remained super strong.  Overall, the economy's growth momentum suggested some moderate slowdown.  The RBA left rates on hold again and shifted the bias of their policy outlook from a mild tightening bias to a more neutral setting - not down. Despite signs of some moderation in the Australian economy's growth rate, the RBA remains concerned about sticky high inflation, this year's pick up in the rate of growth of nominal wages and the pressure on unit labour costs from an apparent slowing in the rate of productivity growth.

Are we seeing a genuine change in the economic outlook and the market's response or an exacerbated over reaction?  In either case, it takes courage for investors to have the conviction to maintain their long -term investment strategy and see past the short-term noise.  Our view is that a diversified, long-term investment strategy is the best response to short-term market volatility. 

Two key points supporting this approach are:

• Consensus macroeconomic expectations are not predictive of short-term share market volatility; and
• Large daily moves are a part of the investment landscape.

Diversification and a consistent exposure to risky assets will ensure that your portfolio catches all of the market moves, particularly when conditions change rapidly. Being out of the market, partially or fully, for even short periods of time can produce different outcomes. 

"The herd instinct among forecasters makes sheep look like independent thinkers."
Edgar Fiedler (American economist, - 2003)