Welcome to our first Investment Insight for 2012. 

The year has started well in our investment markets and the prospect of further rate cuts could spur a mini-rally (especially if the RBA delivers). Interestingly you could argue that the rest of the world isn’t as sure as we are that the RBA will cut as the little Aussie Battler ($A) has shot above $US1.06. If the world thought we were going to get a rate cut, surely they’d be short on the dollar. Never-the-less, time will give us the answer.

And the strength in the markets has been in stark contrast to the gloom spread by economists. In the last week we have had both the IMF & World Bank cut global growth forecasts and talk up European recession. Markets have long expected both hence its ability to shrug of the news about expectations. Whether markets will shrug of the reality of a European recession (should it happen) is an unknown and will most likely depend on the depth and length of any recession.

Its also interesting to note that the concerns on China have ebbed and flowed out of the news for now. Growth in China has slowed (to a still very robust 8.9%). What I see as more intriguing for our resources sector is a slow down in the construction of fixed assets. Fixed asset construction drives the demand for iron ore and a long term decline in this rate of construction (while inevitable) is not what our resources industry would like to see.

Still, reporting season is starting to kick off here in Australia. GUD, the first of the two companies we are discussing today, reported a slight decline in profits for the first six months while Monadelphus, the other company we discuss, reported a profit upgrade. This only serves to again highlight the nature of our two-speed economy which I firmly believe will continue in 2012. A rate cut may help to promote some activity from the consumer but I wouldn’t expect the strong growth (in the consumer driven sectors) we have seen in the recent past, to which many analysts still compare (as the norm).

As always, happy investing.

Nick Rundle

Director of Financial Strategies