The Effects Of The GFC On Australia

14 March 2014

Around five years ago, the S&P/ASX 200 (which measures the top 200 stocks on the Australian share market, representing around 80% of total market capitalisation), reached a crashingly low point of 3,120 points – a massive fall from the pre-GFC euphoric high of just over 6,800 in November 2007. It represented the lowest point in share values during the GFC.

Currently, the S&P/ASX 200 sits at around 5,400, so not yet reaching the heights of pre-GFC enthusiasm. Arguably those hardest hit have been retirees, pre-retirees and fearful investors. Why?

  • Retirees were already living off their savings and didn’t have the opportunity to replace lost investments with salary. As depleted investments were drawn down to meet living expenses, their nest eggs shrank at an increasing rate.
  • Pre-retirees had limited time left before retirement and so limited opportunity to get back to where they were, financially, before the crash. Various reports over the past few years found that the GFC had a significant impact on the timing of retirement for many older workers.
  • Fearful investors risked selling (or being required to sell) their investments at rock bottom – rarely a good financial decision. To quote Warren Buffett’s most recent letter to his shareholders:“The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur… The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs.”

(In hindsight, the GFC represented opportunity for cashed-up investors, of course. As an example, investors could buy Commonwealth Bank shares at the height of the GFC for less than $30; they are now priced at more than $75 and have continued to pay a nice dividend over that time. That’s not a recommendation to buy: just an observation.)

By world standards Australia has responded to the GFC reasonably well through a combination of government stimulus, a resources boom, a responsive Reserve Bank, and pre-existing prudential standards. The GFC-battling measures put in place have come with a price tag, including increased government debt and historically low interest rates which have hit the cash returns that retirees can achieve. Still, many would argue that it is a price well worth paying.

Australia isn’t out of woods, nor fully recovered, from the GFC. Some cautionary notes include:

  • The S&P/ASX 200 index currently sits at 5,410, well up from its 2009 low but also well down from its 2007 high.
  • NAB’s most recent business confidence survey, shows a fall in business conditions in February 2014 – that is despite the official cash rate still remaining at a historic low of 2.50%.
  • Unemployment is at a decade high of 6% – still low by global comparison but creeping upwards. In January 2008, for example, the ABS reported approximately 502,000 people as unemployed; in January 2014 that number was almost 773,000 people. That represents a real human cost of ongoing economic caution.

Where to from here, though? If history is any indication, it will be onwards and upwards – notwithstanding a few bumps along the way.

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