2008 A Year in Review

As we return to work and look at our investments in 2009 many traders and investors may be chaffing at the bit to forget the recent turmoil and focus on the future. This is certainly understandable however taking an objective look back at 2008 certainly does provide some interesting reading and may offer insight in the potential market action in 2009 and beyond.

The Australian market closed the first business day of 2008 at 6353, and although there were certainly signs of turbulent conditions ahead the growth story of China and subsequent demand for our raw materials looked likely to shield the Australian market from the full effects of any global slowdown; however as the trading days passed in January, conditions deteriorated and stocks were sold off aggressively. The S&P/ASX 200 Index booked a monthly decline of 24% led by financials. Highly leveraged Allco Finance typified the rout while CEO David Coe received a series of Margin Calls and commented on the situation as “the perfect storm”. Allco Finance finally collapsed in November.

In February the driver of Australia’s largest investment bank, Allan Moss could claim an uncanny insight into the stormy waters ahead as he handed over the reins to his deputy Nicholas Moore. At the time Macquarie Group was fetching around $70 a share and still looked like the powerhouse it had become during the bull market. Macquarie is now trading below $30 a share and is in the midst of massive job cuts and restructuring to prepare for a tough year ahead where they are likely to be drip fed deals.

ABC Chief Executive Eddy Groves was forced to his knees after suffering Margin Calls however assured the market of his confidence that the business remained viable and short selling was to blame. We would later find out that ABC had inflated the value of child care licenses and when finally written down exposed a level of the borrowing that could not be sustained as credit dried up. Groves lost control of ABC in October before the company collapsed in November leaving many investors scathing at the company and market regulators alike. Class actions are under way.

In March the much anticipated $12 bln merger of Zinfex and Oxiana occurred with market commentators and company executives touting it as the third diversified Australian Miner behind BHP and Rio Tinto, who at this stage were in a fierce battle after BHP launched a hostile takeover bid for its smaller rival.

Oz Minerals was to be the merger made in heaven with Zinfex contributing $2 billion in cash to the merged entity while Oxiana brought some great growth potential in the Gold and Copper space. In the space of 9 months the company is now sitting in a self imposed trading halt as it tries desperately to refinance its debt and sell assets to save it from collapse.

March also saw the collapse of stock broker Opes Prime after ANZ sold shares used as collateral for margin loans. The stock broker used an unconventional lending model retaining clients stock on a company HIN and using the stock as security for loans. When the market tanked and triggered margin calls that clients could not cover, ANZ took to reclaiming its debt. This led to a flood of selling pressure in smaller stocks which proved fatal for some. I led the buyout of the wholly owned but unaffected subsidiary Trader Dealer Online Ltd which is now a substantial asset of the listed entity MDS Financial Group and my private equity firm in Cooroy.

As the Federal Reserve in the US stepped up the anti and bailed out Bean Stearns from certain collapse, interest rate cuts started to filter through to the broader economy. By May the market has shown some signs that the worst may be over however the surging Oil price was seen as a hindrance to growth. Hindsight has shown it be a bear market rally as the index hit 5980 when the recovery stalled and continued its next leg down.

By this time Crude Oil has hit $130 a barrel and showed no sign of slowing down as speculators continued to push the price higher on the premise that the world supplies just won’t be enough. Alternative energy sources were being spruiked. Oil eventually hit $147 a barrel before pulling back sharply as underlying fundamentals of demand start to filter through. Oil is currently trading at $40 a barrel.

By June Super funds are starting to confirm the worst returns in 20 years while optimism builds in the US after Barrack Obama beats Hilary Clinton for the Democrats nomination and takes a vital step to becoming the first African American President.

In August, Congress in the US argues over a possible bailout for financial institutions while the Australian market drops below the critical 5000 level despite companies such as Woolworths, Commonwealth Bank and Telstra providing some hope that company earnings in Australia will hold. Babcock and Brown on the other hand continued to suffer from its high levels of debt and becomes the worst performing stock in the MSCI Asia Index. Founder and CEO, Phil Green finally falls on his sword.

By the 21st November conditions had continued to deteriorate and a yearly low was formed at 3217 representing a 50% retracement from its yearly high. Although the year has closed off its lows, the benchmark S&P/ASX 200 index has still closed more than 40% in arrears; so this leads to the question, what we can expect in 2009 and beyond.
One major uncertainly in 2009 is going to be the demand for Australian raw materials from emerging markets such as China and India. We know that China’s industrial production has shrunk to its weakest pace in almost 10 years and this sounds a warning shot for Australian companies and our economy as a whole.

Valuations are certainly looking appealing however any potential recovery at the start of 2009 is going to be capped by the reporting season in February where company executives unveil the full extent of the global slow down to their bottom line. 2009 is likely to see a contraction in company earnings and this is likely to suppress share prices.

The drop in 2008 has been dramatic, exacerbated by the complex financial structures developed in the bull market to help companies grow at a faster pace. No one can say with any great deal of certainly whether these structures have been fully unwound. This is another uncertainly that will weigh investors at the start of the year.

Although these concerns are real and relevant a large proportion of this has likely been priced into stocks at current levels. There is no question that pricing has deviated from underlying value and this presents opportunities for investors who have the capacity to look beyond the current turmoil. Further countering these concerns will be the aggressive loosening of monetary policy the Australian Government will continue to implement while in the US a change of administration on the 20th January will improve sentiment and could spark a short term recovery given the pending stimulus plans.

I would expect 2009 to continue to be volatile however opportunities for savvy investors will occur. I would suggest investors look towards resources giant BHP Billiton, construction contractor Leighton Holdings, Telstra and retailer Woolworths which could provide the solid basis for a portfolio in 2009. I also believe the Big Four banks will withstand the flood of bad debts expected in the first half and post solid gains towards the end of 2009. QBE insurance and Woodside Petroleum will also present opportunities for investors in 2009.

Despite the turmoil in 2008 and my suggestion to look at more defensive stocks in 2009, my overriding sentiment is that the Australian market will improve, and investors would greatly benefit by readying themselves for such a move. 2009 has the potential to offer once in a lifetime opportunities and those traders and investors that take decisive action will outperform their peers.

MDS Financial maintains offices in Sydney, Melbourne and the Gold Coast. NISER can assist local businesses or individuals. Please contact them for more information. Sean Rothsey is Executive Chairman of the ASX listed diversified financial services company MDS Financial Group Ltd. (MWS: ASX). He works in Cooroy and lives in Sunshine Beach.

If you would like to discuss these issues further please contact Sean Rothsey at niser@niser.org.au or 5442 5050 or your own financial advisor or visit www.mdsfinancial.com.au .

I collated this for your information from The Cube Financial Group Pty Ltd AFSL 232455 (“Cube Financial”) a subsidiary of MDS Financial Group Limited with the following disclaimer: This information is prepared for the general information of traders and investors. The information does not take into consideration the specific needs, investment objectives or financial situations of any person. Any individual reading this should discuss, with their financial planner or advisor, the merits of any recommendation or offer presented in this material for their own specific circumstances and realise that not all investments are appropriate for every individual.

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