David French | 1/01/1900 12:00:00 AM

This article was published in Capricorn Investment Partners Limited's First Quarter Newsletter 2009

Gloomy economic news from Australia’s major trading partners has continued to force Australian share prices back toward their November lows.

This is despite the recent reporting season being viewed as more or less in line with expectations, which were fairly low to begin with.

Earnings per share across the market as a whole fell by just under 14%, which was the worst performance since 1991-92 (source: AFR 02/03/09). In line with falling earnings, a number of companies announced reductions in their dividend payouts, chief among these ANZ, AMP, BlueScope Steel, Wesfarmers and Tabcorp. While the dividend cuts are disappointing from an income point of view, the market has rewarded those companies that have indicated a willingness to conserve capital. Shares such as ANZ and Wesfarmers have outperformed the broader market following their dividend announcements.

A number of companies were in a position however to increase their dividend, among those a number of companies which we view favourably, such Woolworths, CSL, and DUET Group.

Despite the continued poor performance of the share market, there are some positive signs as an antidote to the gloomy news.

A little-known indicator of economic activity, though of importance in an Australian context, is the Baltic Dry Index.

The index is simply a measure of the cost of moving major raw materials by sea (coal, iron ore, grain and others).

The index is calculated by canvassing shipping brokers around the world on the cost of shipping a range of cargoes on various routes (for example, how much would it cost to ship 1,000,000 tons of grain from Los Angeles to Tokyo?).

INSERT CHART

The chart (above) clearly shows the index reached an unsustainable high in 2008, with very rapid falls in the second half of the year. The encouraging aspect however is that it does appear to have bottomed in recent months, which is a positive sign for export and thus economic growth (source: Bloomberg).

The index is closely followed as an economic indicator because it is a very close proxy for global economic activity.

The demand for global shipping has a high correlation with the consumption of raw materials, which is closely tied to future levels of economic growth.

A recent spate of corporate activity is also a welcome development, as it is generally a sign that companies themselves are beginning to view one another as undervalued. We expect to see a number of companies take advantage of their strong balance sheets to acquire competitors or to diversify their operations in new markets or geographic regions.

Housing market clearance rates have also improved over the past 4 months, helped largely by the government’s First Home Buyer bonus and the rapid reduction in interest rates by the RBA.

The Investment Collective (AFSL 471728) is a non-aligned financial planning and investment firm specialising in providing tailored financial and investment advice for individuals and small business. Capricorn Investment Partners Limited's services include financial planning, share trading, portfolio management, insurance broking and self managed super fund administration. Additional information on services provided by The Investment Collective Limited can be found by following this link. Readers are reminded that this document has been prepared for general information purposes only, and any advice contained herein has been prepared without taking into account your financial objectives, situation or needs. Readers are advised to see their financial advisor prior to acting on any general advice.

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