Lehmans Brothers Collapse – 12 months on
The markets and global economies have staged a remarkable recovery from the dim days of this time last year as the world financial markets stared down the abyss.
The collapse of Lehman Brothers brought about a systemic collapse of the global financial systems. The US Government allowed Lehman to fail, after bailing out Freddie Mac and Fannie Mae, but at the time did not realise the catastrophic consequences of such a decision. Globalisation has meant that the global financial systems had become so inter connected world wide, the fallout from this crisis reverberated across every continent.
The systemic collapse of the US financial system meant that banks worldwide were not prepared to lend to each other, and this resulted in a freezing of the credit markets, which in turn meant that corporations ran out of funding to carry on their business operations.
Central Governments around the world had to pour money into their respective economies, prop up their banking systems and provide banking guarantees to ensure the credit markets began resuming normal operations.
To date these measures have been extremely successful. However there are concerns that many governments have effectively had to nationalise significant portions of their banking systems, at huge costs to the respective taxpayers. At some point these governments will have to turn off the stimulus spending that has seen the world economies step back from the abyss, and this will require a fine balancing act between government intervention and the capitalist systems to ensure the economies continue to function normally. At the recent G-20 meeting, finance ministers indicated that stimulus spending would continue as long as necessary.
The Australian Economy Now
Australia may come out of the financial crisis as the only developed country to avoid a recession. With the US, UK, European and Asian economies falling off a cliff soon after share markets crashed late last year.
In Europe, recessions in France and Germany officially ended last quarter, but their real recovery is expected to be slow and difficult. The UK economy has dropped 5.5 per cent over the past year which is the largest since their records started in 1955. The US economy has shrunk for an annual decline of 1 per cent.
Australia has fared well in comparison. China our key trading partner for our exports and resources is faring even better with economic growth at 7.9 per cent.
GDP
Australia has avoided recession by posting positive growth figures over the past two quarters, with GDP better-than expected growth of 0.6 per cent in the June quarter. This positive figure means the economy is growing, consumers are spending and jobs are being created. GDP is a key measure of just how Australia is faring through the global downturn, it tells us if the economy is growing or shrinking, by measuring the number of goods and services bought and sold.
The latest national accounts show Australia has been the best performing advanced economy over the past year according to Treasure Wayne Swan.
Interest Rates
Interest rates are at 49 year lows at 3.0 per cent, having come down from 7.0 per cent this time last year. There may be head winds on the horizon as the Reserve Bank Governor Glenn Stevens has said the only way for rates is up, calling 3 per cent an emergency level cash rate.
Aussie Dollar
The Aussie dollar (AUD) peaked at 96.3 mid last year (just before the Lehman collapse). The AUD has had a great run against the US dollar since bottoming in February at 65.7 cents. It looks set to retest those levels in the near term, so long as the US dollar continues to deflate and Chinese investment continues to pour into Australia.
Unemployment
Unemployment has remained steady at 5.8% for the past three months, however there are concerns here are number of hours worked and participation rates have dropped. Our unemployment rate fares very well against other key developed economies including: UK at 7.7%; US at 9.7%; and Spain at 18.5%.
Where to now?
A perspective on the predicament that the ASX has faced since the start of the global financial crisis is illustrated in this chart. The index has travelled from an all time high of 6897 in October 2007, all the way down to 2982 earlier this year.
Figure: ASX 200 Chart of 2003 to now
The Australian economy has fared well in comparison to other developed countries in the world. We still have reasonable unemployment levels, with an expanding economy (GDP up 0.6% for the June quarter), and we have a resource base which is the envy of many.
China is eagerly consuming Australian resources and is keen to acquire and/or take major stakes in our mining and exploration companies in order to sure up supplies of resources to underpin their growth for the next couple of decades. The other driver for Chinese investments is the fact that the US dollar is deflating. Chinese government is one of the biggest holders of US dollars, so they are keen to exchange these dollars for hard assets as quickly as possible. Refer to the What’s Hot article for some stocks to watch in this space.
The ASX200 index looks set to make a move towards the 5000 level, which would mark a 50% retracement of the total move from October 2007 through to February 2009. There may be a pull back in the interim, but look for near term support around the 4250 level. If this level fails then the next support level would be around 3800. Keep an eye on the Chinese market which has underpinned the move of both Australia and the US markets since October last year.
By Micheal Hevern
Head of Research
