Snakes In The Grass ? Are The Global Risks Scary?

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February 15, 2013 10:13 AM EST

By Peter Switzer, Switzer Super Report

The outlook for the Australian share market is still strong, even if some are already saying it's overvalued. But you need to have a good understanding of the risks so you can insulate yourself from any potential threats.

A few weeks back, when I was not worried about snakes, I wrote on my switzer.com.au website that this could be the year of living dangerously, with the evidence mounting that 2013 would be good for stocks.

Yesterday reinforced my argument with the Commonwealth Bank ((CBA)) shooting the lights out again and the S&P/ASX 200 index beating the psychologically challenging 5000 level.

I called it this way last year, but I always added that I was cautiously optimistic. I also recommended you look for great income or dividend stocks and the portfolio Paul Rickard and I put forward made over 20%, even though we were only chasing a 7 to 8% return.

Despite my optimism this year, there are some concerns out there. Let's look at the potential threats and evaluate how scary they are.

Global threats

In the USA, I have no concerns about growth with the housing sector on the mend, despite some crazies worrying about a housing bubble! Inflation is a worry for maybe 2014 or 2015 but I hope the central bank does not take away the punchbowl of liquidity too soon. Kumar Palghat, the founder of Kapstream Capital, which is a bond fund for institutions, is not bothered by this in 2013.

He thinks the main goal of the Obama Administration will be to keep growth building to help pay down the debt. Becoming more austere and debt responsible should wait for the third and fourth years of the presidential term.

Kumar, who is an ex-Californian and worked with the world's biggest bond player ? PIMCO's Bill Gross, liked stocks last year and likes them again this year. He thinks the Congress will cut a deal on the sequester that brings automatic spending cuts on March 1. If he is right, and I think he is, the Yanks won't derail this stocks rally.

To China now, and recent economic growth and trade figures show the economy is set to produce a solid year.

I especially like the growth in exports to Association of Southeast Asian Nations (ASEAN) countries, which were responsible for a 43% jump in their purchasing of Chinese products and services.

The International Monetary Fund (IMF) identified the ASEAN group as important to helping world economic growth and predicted they would revisit pre-GFC rates. This demand for Chinese exports is a nice sign.

Snakes alive

Against this, China is in the Year of the Snake and there is a correlation between this and weak stock markets. Believe it or not but September 11, Pearl Harbour and the 1929 Crash were all Years of the Snake.

However, in many of these years, stock market valuations were sky high, which is not the case now, with most number crunchers still arguing stocks are cheap ? even in the USA ? despite the big run up of stocks since mid-2012. That said, the Chinese investor and the Shanghai Composite are important to world markets and our friends from the world's second biggest economy are a superstitious lot. I rule out this market threat on rational grounds and the fact that the Shanghai Composite has already defied the Year of the Snake with big gains in January, although as an owner of a mountain property, I have to admit that snakes still do spook me a bit!

On the subject of old snakes, Kumar was worried about Italy and Silvio Berlusconi's run for the top job at the upcoming elections. His bond operation has made money out of Italian bonds by buying them when yields were high and times were riskier but heading in a better direction. The threat of old Silvio has seen him exit Italian bonds but he indicated he could return, provided Italians don't fall for the media magnate's magnetism. Could Italians seriously reject what Mario Monti has created ? economically responsible policies that brought down the country's borrowing costs ? for Berlusconi? I hope not as it could unsettle markets as Italy is Europe's third biggest economy.

Generally I think Europe could have a good year and I like the suggestion from the ECB's Mario Draghi that it is time for a positive contagion after too many years of the opposite.

Sitting comfortably

Finally Japan was more of a worry when they were using the same old plan that has virtually given them nearly twenty years of tepid growth or recession. The new leadership is opting for QE, a lower exchange rate and a higher inflation target. This will bring growth in 2013 and should help world demand, as they are still our second most important export customer.

Sure, there are other potential X-factors that could involve the Middle East, India, US Congress, EU politicians, emerging economies or even the loopies in North Korea, but I am betting against these hurting the rally.

As you can see, I am comfortable with the big issues that could scare investors in 2013, and so I only hope that Canberra, as well as the Reserve Bank (RBA), can add positivity to the mix for the sake of the economy and our share portfolios!

We don't need any local snakes in the grass coming back to bite us with so many on foreign soils.


Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

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