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What to watch in the coming weeks

I was sitting in a café in the Blue Mountains and was spotted by a guy who used to work for St. George Bank a few years back and had now retired. Apart from the usual hello, his first question was – “are you a stayer?”

In fact, it was Caulfield Cup Day, but I suspected he wasn’t talking about punting on the four-legged lottery of the sport of kings.

Looking a little puzzled, I inquired: “You do mean the market?” He nodded and I said: “You can bet on it!”

My investment strategy, in case you haven’t noticed, is to buy about 20 companies. This helps keep my exposure to any one company to about 5% (although I do sometimes break this rule for companies I like for dividend purposes).

Once I’ve got my companies, I’m a stayer. Especially in times like these when the term deposit rate is 6% at best, then I think you can hold a parcel of stocks that will return around 5-6% a year in a flat market; add in dividends and franking credits and this return can be closer to 8-9%. And if you invest using your SMSF, then your franking credits could possibly bring you the added bonus of a tax refund (read, How your SMSF can end up with a tax refund [1]).

By the way, if the stock market manages even just a small rise in share prices over the year, then that return would be closer to 10%, which is pretty damn good, especially if the cost of running your SMSF is low — and it should be or I’d stop doing it!

Sure, there will be times when I will reposition my portfolio to ride the capital gain, but that’s when I’m prepared to take the risk.

So, can we finish the calendar year positively?

My gut feeling tells me ‘yes’, but I know my portfolio’s value is going to be determined by, as CNBC’s Bob Pisani says, “the hands of a bunch of European bureaucrats”.

And while these bureaucrats have not been great deliverers, Pisani has pointed out that the CEO of German bank Deutsche Bank, Josef Ackermann, has said he’s “confident we are getting closer to a comprehensive package” that should sort out Europe’s woes.

The big events to watch will be the EU Summit on 23 October and then the G20 on 2 November. At the moment, we’ve seen markets turn positive on Euro-talk, but now we have to see some Euro-walk.

Pisani sums the real issues up in a nutshell saying that the New York Stock Exchange’s traders want to know what the now approved European Financial Stability Facility will actually be able to do. Then there is the issue of recapitalising the banks and whether these lenders to the PIIGS — Portugal, Italy, Ireland, Greece and Spain — are prepared to cop a bigger haircut than they were earlier in the year.

Finally, traders want to know what the role of the International Monetary Fund will be in smoothing out the rocky road ahead for the PIIGS and ultimately, the exposed banks. Remember, this is the reason our stock market has been rocked – the fear of a credit freeze will always do that. However, the end of fears over a credit crunch can lead to a big bounce back in stocks, just as we saw in early March 2009.

One final point: all of these protests against corporate greed around the world —Rome had a big one over the weekend — will put more pressure on European politicians to get real. Normal people are getting sick of the type of capitalism run by our current crop of politicians, and so some genuine leadership needs to be found.

And while we could do with some of that here, I reckon where they need it most — Europe — has the chance over the next few weeks to either make or break both their own union and our portfolios’ values.

In Europe we trust!

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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