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The financial world is not in a happy place, and investors as represented by global stockmarket are becoming disillusioned about the future. Fear is ruling and the media is having a field day with dire predictions of what the future may hold – Germany breaking off from the EU, the end of the Euro, burgeoning global unemployment, and the fear mongering goes on.

While it does make riveting reading worthy of a Tom Clancy novel, the question for Australian investors is: Does it affect me? And if so, what should I do?

If you are exposed to Australian equities the global sharemarket rout does affect you as the Australian sharemarket has taken a hit alongside its global peers. The top 200 stocks in Australia have lost around 11% of their value over the past 3 months, and almost 5% over the last 4 weeks. If you own shares in any of these stocks, your portfolio, too, would be lower.

The recent chapter of this crisis concerns the European banks exposure to Greek debt, with French banks Credit Agricole SA and Societe Generale cut one notch this week by credit rating agency Moody’s. France’s biggest bank BNP Paribas is in line for a possible downgrade, although its profitability and capital base should support its exposure to Greek, Portuguese and Irish debt, the agency reported. Media headlines sang out, “the crisis is reaching a climax,” which does little but stir more fear in the hearts of the everyday investor.

Why do European banks concern you? If you are a shareholder in Australia’s largest banks such as Commonwealth Bank, Westpac and so forth, then the European debt crisis will affect you indirectly; indeed, many Aussie banks have already dropped by double digit returns this year. The reason for this is that Aussie banks are dependent on global debt markets for around 40% of their funding, and as European banks capitulate then the costs of this wholesale funding soars. The welcome news is that most Aussie banks have secured their funding in advance and are well capitalised; nevertheless, they are certainly not immune from the crisis as represented by their share price over the last little while.

When markets capitulate, investment funds that roam globally, tend to bee line towards the US dollar, which is ironically regarded as the ‘safe haven’ currency. Already, you might have noticed that the US dollar is beginning to appreciate against the Australian dollar, as represented by the following chart. It’s currently sitting at a level not seen since April this year.


If the crisis continues for weeks or months, the Australian dollar will most likely weaken. How does this affect you? If you’re heavily invested into international assets (such as an international managed fund or an ETF priced in US dollars), then your returns will improve as the Aussie dollar weakens (in other words, you make more for each buck that you own in US dollars when you come to swap it back into Aussie dollars).

The major concern for Aussie punters is that further share falls are on the cards – and if so, should you sell now?

Rather than getting caught up in media headlines, finance experts tend to look at the indicators for the beat of the market. Here are some signs to watch out for:

•    Watch commodity prices and commodity currencies – When fear peaks, commodity demand falls on expectations of lower global demand. Popular ways to gauge this is to monitor commodity currencies such as the Australian dollar and the Canadian dollar. The index that many traders use to gauge commodity prices is the Thomson Reuters/Jefferies CRB Index, quoted on the NYMEX, CBOT, LME, CME and COMEX exchanges; the index consists of 19 commodities across the spectrum.


Watch for credit spreads – during the global financial crisis of 2008, bond indices fell and US Treasuries rallied. Many traders use the AGG (iShare Bond Index ETF) in the US as a gauge for the performance of all bonds, and get nervous when AGG dips suddenly. This ETF is often compared with IEF, which represents the 7-10 year Treasury ETF. When AGG significantly underperforms IEF, investors get worried.

Has the selling run its course? Most commentators expect more selling pressure as the market tries to find a bottom. Therefore there is no rush to buy in. Take your time, and do your research. There is no rush as the recovery is not going to happen overnight and the chance of more panic selling is high.

Rather than searching for the market bottom, investors should cautiously seek out sold-off blue chips with money that can be invested for the long term. You’d want to be locating well-known blue chips with a history of earnings and strong cash flows that should continue to perform in subdued economic conditions. These companies should have low debt-to-equity ratios, a loyal customer base and wide moats.  Essentially, stock pickers should target good dividend yielding companies as well as stocks whose fundamentals do not change if the crisis in Europe and the US continues.

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