• If the Australian economy is doing so well compared to the rest of the world, why isn’t that reflected in our share market values?
• If the US is in such turmoil, why has the Dow Jones Index recovered to be within 10% of its all-time, pre GFC high?
•  Why is Australia’s All Ordinaries Index still around 40% below its pre GFC high?

The answer is simple: a lack of confidence!

However, the lack of confidence we are currently seeing is unsubstantiated. Our resources sector is booming, unemployment is at historically low levels, interest rates are decreasing, corporate debt is low, sovereign debt is low (compared to world standards), domestic savings are at record levels and our standard of living is one of the best in the world. So what are we so worried about?

Admittedly, our confidence is not helped by political instability and uncertainty, but I don’t believe this to be the major influence.  

There is no question that our share market is grossly undervalued by historic measures of PE ratios and dividend rates, net equity ratios and returns on equity. Yet, currently fear controls investor’s emotions and therefore actions; fear that is constantly reported by the media.

Now that the US economy has returned to growth, the focus has shifted to Europe.

Most recently we have seen numerous successfully oversubscribed sovereign bond issues in Europe – so the bond market doesn’t seem to be concerned. Any snippet of news predicting economic doom and gloom in Europe for possible decades to come lacks explanation of the facts and insight as to why this may occur. The fact is,  it’s taken many European countries decades of poor fiscal management to get them into trouble. So logically, it is going to take many years to resolve. All we have heard from European leaders over the past six months is their collective resolve to deal with their problems. They are taking appropriate action to solve their problems so why is this not reflected as the main issue in the headlines? Someone had better tell Germany that they are in for a bad time – as their economy is surging ahead regardless. 

We are all aware (but sometimes forget) that the media loves to report bad news. Front pages are often filled with negativity, fear and exaggeration. Take for example the recent credit rating downgrade of a number of European countries by credit rating agency Standard & Poor. The next day, headlines in most newspapers predicted more doom and gloom. In reality this downgrade had been expected for months and the other key ratings agency Moody had not downgraded its ratings. So in effect nothing had changed, but the reporting of the issue did not reflect this.

In my opinion, the Australian media has a lot to answer for in the manner it reports the news by inciting fear for the sake of a sensationalised headline and affecting investor confidence. However, it is up to the individual to investigate the facts, seek expert advice and have in place long-term investment strategies that can withstand the ebs and flows our economy is currently experiencing.