Two of the big issues dominating headlines this month are European Debt and the Mining tax.  Interestingly, we first wrote about both these topics in May 2010, some 18 months ago.  Whilst I have no actual data, I suspect these two topics have consumed more than half the news space over that time.  So what, if anything has actually changed?

Well let’s start with Europe.  Back in May 2010 I remember being somewhat comforted by the €750 billion bailout plan from the European Union (EU) and the International Monetary Fund (IMF).  Not because I believed by any stretch that this would actually solve the problems, but because prior to this there didn’t seem to be enough acknowledgement of the real potential problem faced.

This began a series of meetings, followed by various announcements that have provided a steady stream of the kind of doom & gloom that the media dare to dream of, after all columns that “fill themselves” are the most efficient.  Back then, we began to realise European governments were broke after years, if not decades of inflated public spending with little or no tax increases to cover the promises.  In some cases the nirvana of lower taxes AND increase government services persisted, papered over by full and free access to credit markets which, in chasing the returns, seemed to dismiss the idea that even governments had a borrowing limit.

 So what’s really changed? 

As far as I can see, honestly not a lot.  Europe is still broke and has a long way to go before it’s fully digested this problem.  I’ve little doubt that much of Europe is in for a very tough decade with minimal economic growth likely over the next 10 years and the talk of recession fairly constant over that time.

So what’s does that really mean for investors? 

Again, I’d have to say not much has changed.  I discussed the link between economic growth and company returns back in July and not surprisingly that hasn’t changed either.  The simple fact is many companies thrive in tougher economic times.  When we consider the developmen in Asia, the outlook changes considerably.  Nearly half the world’s population will move to a consumption based economy over the next decade or more, creating an unprecedented opportunity for quality companies to continue to grow, regardless of their domestic economies.

But surely this means lower returns for investors moving forward?

Possibly, but not necessarily and compared to what?  Can investors in quality companies expect to generate 8-10% pa net of costs over the next 10 years?  I absolutely believe so.  In fact I believe it will be much easier than almost any other time in history, you will simply have to be more careful in selecting good companies.  In “bull markets” the bad often get dragged along with the good and there’s little reward for selecting quality.  This will almost certainly not be the case in the next decade.  15-10% is unlikely except in the more extreme cases but then this isn’t the norm and 8-10% pa actually produces a very good long-term result.  In fact, in my experience few have ever done much better, even in, much better times.[1]

How can you be so sure?!

Apart from the obvious opportunities developing countries bring, one only has to look at the actual results achieved last quarter by many of the top businesses around the world.  Yes that’s right, in the middle of all this turmoil, despair and sharemarket volatility, many of the best companies around the world are hoarding unprecedented levels of cash, underpinned by strong earnings growth.  With record low levels of debt and increasing access to the growth in Asia, for many, business has rarely been better.

Take a look at some results from last quarter:[2][3]

Consumer Brands


Profit up 10%, with total volumes up 5% (European volumes up 5%)

Yum brands (KFC, Pizza Hut & Taco Bell)

Profit up 12% (China profit up 25% & same store sales up 18%)


Profit up 19% – same store sales up 6% in Europe



Profit up 30% total payment volume up 13%


Profit up 36% total payment volume up 16% (Europe up 14%)

PayPal (owned by EBay)

Revenue up 30%

Internet and technology


Profit up 35% with Revenue up 28%, volumes up 18%


Profit up 20% with volume up 17% (US volumes up 14%).


Profit up 10%, revenue up 7% (to a new record)

These results show that even during apparent difficult times, quality companies can continue to produce strong profit results, even profit growth.  With these results you would expect decent “performance” from their share prices at least, but this has not been the case.  In fact in recent months, many quality companies have seen their share prices decline.

Results in Europe achieved by the companies above paints a very different picture to one constantly promoted across all media.   “Europe’s in Trouble” is far from a universal statement and in fact “European Outlook in great shape” applies equally, but to companies NOT governments.   Government debt may well be in trouble however these results confirm that for many businesses, business in Europe is a very different story.  Not surprisingly however, bad news trumps good.

As we have stated many times, this is in fact normal as sharemarkets in the short-term are simply not focussed on profit.  In fact strong profits can still result in a share price drop for a number of reasons. Perhaps the “market” expected more and was disappointed or maybe sentiment was affected by some unrelated data or news which resulted in a general share sell off.

Are you really that confident in the future?

Quite frankly, yes.  With the future market growth opportunities for companies like those described above both in their traditional markets as well as the developing world I’m extremely confident there are plenty of opportunities in the world, regardless of how the problems in Europe and to a lesser extent, the US are ultimately resolved.

Many mistakenly believe the best time to be invested is when share prices are rising[4].  This may seem obvious, however history shows that this normally occurs as chase returns often after a series of good results.  History also shows us the best returns follow good results when share prices are still low.   Given the opportunities of the future and the lessons of history, I seriously doubt there’s been a better time to be invested.

But how can you be so sure sharemarkets will go up? We haven’t seen anything like this before

Well, let’s address the second issue first.  Whilst in many respects we may not have seen a bear market like this before in terms of the issues being reported, but with respect to the things that really matter, we have many times.

A look at the worst bear markets shows us that this is far from unprecedented.


As the above shows, this is now officially the “worst bear market” in history with the headlines remarkably similar to other “worst ever” times.  The headlines confirm we really have been here before.


In fact for a whole host of reasons, now is most definitely a good time to be invested regardless of what the sharemarket prices appear to be doing.  The main reasons include

  • Valuations are cheap – many very good companies around the world are generating record returns from their businesses and their opportunities for growth are excellent (see above examples)
  • Prices have been low for some time and they have been lower – it is increasingly unlikely we’ll revisit the lows of March 2009.
  • The world economy is continuing to grow – this is extremely unlikely to change – what’s changing is simply where that growth is coming from.  This may be bad news if you’re European retailer with no online presence but try convincing the average Chinese former farm worker whose income and standard of living is increasing rapidly each year that the future will be worse.
  • Australian Share yields are high  – average yields from Australian shares are as high as Term deposits and in some cases much higher – bank dividend yields are nearly twice (yes 2 times!) as the same bank’s term deposit rates.   That means even if the share price NEVER goes up you’ll still nearly twice the income each year!

We discussed in July the relative importance of economic growth for investment returns.  Essentially growth is important in the long-term but has no impact on returns in the short term.  There are plenty of businesses who thrive in recessions, just as there are those who struggle in booms.  It’s important to align your portfolio accordingly to ensure those future profits make their way into your hands.  Given were the future is likely to head, we remain confident we are well positioned to take full advantage and we are therefore very comfortable, even excited about what the future holds.

“Government Europe” is in trouble and this is unlikely change significantly any time soon.  Most importantly though there’s plenty of “Corporate Europe” in great shape – and this is also unlikely to change any time soon.

[1] See the Dalbar study July’s “you lose on the way up”
[2] How many of these results do you remember hearing? These are excellent results in any conditions, yet given little recognition.
[3] Companies examples provided for reference – definitely NOT a recommendation
[4] Again see the Dalbar study in July’s “you lose on the way up”
Matt Battye

Matt Battye

CEO, Financial Adviser

Analysing what can seem to be like complex issues, Matt is effective in using analogies to better explain scenarios and truths to the rest of us. This is what Matt enjoys – educating clients on the truths and debunking the commonly held (wrong) view.

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