Given the current economic climate we feel it is prudent to forward the below update from our financial planners in Life Planning Solutions. Although we would urge you to exercise patience and not to make any investment decisions without discussing your personal situation with a financial planner, we can understand the current market is challenging.

The Positive Signs through the Current Market Volatility

Firstly let us set the backdrop of what we have seen so far:

• The US government agreed to increase the limit of what they could borrow after much bickering between the two major political parties.  The US had a 2^nd of August deadline as they needed to make social security payments on the 3^rd of August and there was little cash to make the payments if no agreement was reached.
• The US agreed to raise their borrowing limit with just over a day to spare. This started to make people nervous last week.
• Over the weekend one of the three major ratings agencies, Standard & Poor’s, downgraded the US credit rating from AAA to AA+. This has effectively spooked investors and has been the catalyst for where the markets are today.
• In addition Italy has been a growing concern with its tenuous financial position.

The current situation begs the question - how serious is all this? We believe that we are seeing an over-reaction by panicked investors and our analysis of the situation leads us to highlight the following points:

• The US is unlikely to default on its debts as it has the ability to independently print more of its own currency, unlike Greece and other countries of the European Union. The Standard & Poor’s downgrade is largely a political analysis of the ability of US politicians to deal with economic problems in a timely fashion as opposed to suggesting they are more likely to default now than six months ago.
• Make no mistake, a AA+ credit rating is considered “high grade” and the likelihood of being paid back is “very strong”.
• The other ratings agencies have not downgraded the US.
• The US job numbers which came out over the weekend were slightly stronger for July but the markets seem to have ignored this news.
• The European leaders are highly likely to agree to an appropriate rescue package for Italy if required (and in any event the Italian government is not in the same position as the Greek government).

Outlook

Actions taken by governments and central banks (in the main in Europe and the US) will remain a key driver of market volatility. Government debt levels will continue to disrupt markets though it is likely markets have already priced in much of this concern. A few points to make here are:

• There is a lot of cash on the sidelines;
• Most large corporations have strong balance sheets and increased profit numbers;
• The outlook for China is positive, and despite recently putting the brake on a possible property bubble and inflation concerns, China has the luxury of being able to use both a brake and an accelerator;
• Australia is well placed with low unemployment, a high savings rate, the ability to reduce interest rates and introduce more Government spending if need be; and
• While the ride for share markets and other assets may remain rough in the short-term, taking a longer term view they are likely to be supported by attractive valuations.

A patient and considered approach to the current situation will reward those that are prepared to look past the short term market noise.

As always, please do not hesitate to contact a financial planner at Life Planning Solutions to discuss your situation in more detail.

The Team
Life Planning Solutions & Harrington McNamara