1. 28 September 2011
Swimming against the tide
Martin Becker
Introduction
For the investor, what matters most is the market’s primary (secular) trend, not the day-to-
day (cyclical) trend.
If you stand on shore and look out at the ocean, it is impossible to tell at any given moment
whether the tide is coming in or going out.
By the same token, watching the action of the stock market on any given day, it is equally
difficult to determine whether it’s a secular bull market or bear market. But the fact is that
the tide of the market is always either coming in (bull market) or going out (bear market).
It’s the determination of the major trend which is so difficult. Yet that determination is
critical.
This is made more difficult by the financial media, who today reports in near real time,
ignoring the markets longer term cycles.
Long Term themes that will impact investment returns over the next 5 years
To determine the market’s primary trend over the next 1 to 5 years, a useful starting point is
to digest the day-to-day news and summarise the major themes influencing our
environment that will act as key drivers of financial market direction and performance:
Moore Stephens Sydney
Wealth Management Pty Ltd
Level 7, 20 Hunter Street 1. Global Financial System: Europe and the US are likely to remain economically
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Australia stressed with lower economic growth due to (a) the undercapitalisation of the banking
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system and the apparent lack of effective policy action in Europe, and (b) a period of
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sydney@moorestephens.com.au deleveraging and reduced confidence ahead in the US. This is likely to result in low
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growth for much of the developed world forcing investors to look to emerging market
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2. 2. A Euro Zone restructure: The financial turmoil in Europe is no longer a problem of
small peripheral economies like Greece; risk has now spread to the larger economies of
Spain and Italy. This places the common currency and Euro zone structure itself under
threat which could result in a restructure of the European Union to include a group of
countries at similar stages of economic development.
3. Regulation of the Financial Sector: With the tightening of regulation governing the
financial sector, as well as a new focus on reducing debt and increased savings, the
financial sector is likely to generate lower earnings growth and investment returns than
those enjoyed over the past 10 to 15 years.
4. Heightened Volatility: As a result of high levels of private and public debt around the
world, reactive monetary policy settings and government intervention, as well as a lower
tolerance for risk amongst investors, we should expect a more volatile global economic
and investment environment. Going forward, the new focus for investors should be on
capital preservation and structuring equity holdings for quality (invest in businesses that
are leaders in their industry, with strong balance sheets and generating sustainable
profits) and for yield.
5. Growth in Emerging Markets (in particular Asia): As a result of rapid and continuing
urbanisation and industrialisation in the emerging world, economic growth rates in
emerging Asia is likely to be 2 or 3 times greater than the developed world. In addition,
emerging economies have displayed strong economic management resulting in low
levels of debt and cheap currencies. This does suggest that Asian equity markets will
continue to outperform developed markets over the longer term.
6. Demand for commodities to stay strong: China’s industrialisation and consequential
demand for industrial commodities and energy indicates continued support for the
demand of hard and soft commodities as well as energy. Notwithstanding cyclical
fluctuations, the longer term trend in commodity prices is therefore likely to stay strong.
7. Inflation: Without further quantitative easing, inflation is likely to remain low or negative
over the next 1 to 2 years due to an increase in spare capacity, lower household
spending, reduction in bank lending and rising unemployment.
8. Social unrest: The uneven distribution of wealth and income coupled with further
economic weakness is likely to raise social unrest and crime rates.

3. Portfolio Considerations
The consequences for portfolio construction and implications for investment markets as a
result of the long term themes discussed above are: likelihood for lower investment returns
coupled with higher volatility; reduced appetite for risk with a focus on the preservation of
capital; a preference for investments which offer attractive income yields; and seeking
growth opportunities within each geographic and industry sector.
The Australian Dollar
The Australian Dollar is caught between two opposing forces: (a) a slowing global economy
and the resulting fear that may result in a fall in commodity prices with the consequential
weakening in the AUD, and (b) on a relative basis against the USD, EUR and GBP, a
combination of long term debt problems with the potential for more quantitative easing will
keep these foreign currencies weak in both absolute and relative terms against the AUD.
Ultimately, the Australian dollar is likely to benefit from the long term demand for
commodities. Hence despite an uncertain short term outlook for the AUD, the longer term
outlook remains positive.

4. For more information please do not hesitate to contact one of the following members of our Wealth
Management team:
Charlie Viola +61 2 8236 7798
Director
Martin Fowler +61 2 8236 7776
Director
Martin Becker +61 2 8215 7920
Associate Director
Haris Argeetes +61 2 8236 7851
Manager
Disclaimer
The information provided is not personal advice. It does not take into account the investment
objectives, financial situations or needs of any particular investor and should not be relied upon as
advice. While the information is provided in good faith and believed to be accurate and reliable at
the date of preparation, we will not be held liable for any losses arising from reliance thereon. We
recommend investors consult their personal financial adviser to discuss suitability and application
to their individual circumstances. Articles represent the opinion of the author, Martin Becker, and
may not necessarily be representative of the views of Moore Stephens generally.
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