The Australian share market continued to consolidate recent gains with the All Ordinaries increasing by 1.6% for the month to close September at 4,406.30 points. Aussie shares have now gained 7.2% for the 2012 calendar year.
Global shares were also positive in September, with the Dow Jones Index up 2.6%, the FTSE up 0.5%, the Nikkei 225 up 0.8% and the Hang Seng up 7.2% for the month.
With uncertainty remaining the name of the game, investors received a confidence boost in September with possible further market intervention mooted from the Federal Reserve in the United States and the concept of "sterilized bonds" in Europe as outlined in the much anticipated speech from European Central Bank (ECB) President Mario Draghi.
Don't underestimate the effect of the ECB's announcement in early September. In effect, it allows for unlimited support to buy shorter dated European government bonds provided the receiving government agrees to strict conditions.
Importantly, and unlike the United States style Quantitative Easing program which was aimed at stimulating the economy, the ECB's bond purchases will be fully "sterilized". Put simply, this means that the money the ECB puts into the financial system will be offset by the ECB withdrawing amounts from the system at the same time.
By withdrawing amounts from the system, this ought to avoid the potential inflationary pressures created when an economy is flooded with liquidity. Inflation risk is often overlooked by investors in these “risk adverse” times.
The chart below illustrates the importance of inflation to the longevity of a pool of assets.
As shown in the chart above, a 3.0% per annum change in the rate of inflation has a 5 year difference to the longevity of the asset pool. In calculating these results, I have assumed a 6.00% per annum rate of return and $25,000 per year expenditure (2012 dollars).
In interest rate news, the RBA board meets today and will make its interest rate announcement at 230PM (EST). Retailers are pushing hard for a further rate decrease to support a fledging domestic retail sector.
The Australian Dollar was steady in September and is currently buying US103.52 cents.
For more information please contact Ryan Love on 1300 856 338 or e-mail ryan.love@apexpartners.com.au.
This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.