Zurich Investments Market Update
May 2010

You know what I hate? You know what I hate? Fat-fingered traders.

Haven't we got enough issues in the world without some nuffy (allegedly) putting on a sell order for $16 billion rather than $16 million?

That generated quite a roller coaster ride on global equity markets late last week. At one stage on Thursday night the Dow was down almost 1000 points before staging a late rebound, though still finished down 348 points or 3.2 per cent.

Fat-fingered or not, market conditions have clearly deteriorated in recent days and weeks.

Despite a sound reporting season in the US, the issues in Europe will not go away and bloodshed on the streets of Greece shows the turmoil is at boiling point. This was exacerbated by the Greek Parliament passing stern austerity measures late last week to trigger the EU bailout package. The latest plan is to provide a 600 billion Euro package which can be accessed by all the PIGS (Portugal, Ireland, Greece and Spain).

Is it enough? It will no doubt help calm financial markets, but core fiscal and competitiveness issues remain to be addressed.

What about troubles in other parts of the world? Rationing of credit in China is fuelling fears of a hard landing, also upsetting the market's mood. This, together with our shiny new Resource Rent Tax in Australia, has seen local resource companies sell off heavily last week. This puts the "shape" of the global recovery into the spotlight.

So the big question is are we seeing the much feared double dip or just some heightened short-term market volatility?

Rather than answer this directly and run the risk of getting it wrong, let me palm it off with a few assertions. (Hopefully you won't accuse me of being an oxygen thief despite them being in truth fairly self-evident observations).

1) I hate all that alphabet soup, anyway - you know W-shaped, U-shaped, etc. I even heard some guy seriously suggest a square root shaped recovery the other day. Surely a more colourful description would be "I believe the economy will bounce a bit and the display growth characteristics resembling the heart beat of a dead man". (Note to self: stop attending economic conferences).

2) Remember China can manufacture any rate of economic growth it wants for the next decade at least. What does this tell us? Well that a two-speed world is alive and well. Most of Europe is a basket case, Asia including Australia will be strong, and the US might be somewhere in between if they are lucky. (hang on that's three...)

As a footnote, my belief is we are probably witnessing the unravelling of the EU in slow motion. Germany, in particular, must be getting sick of bailing out peripheral countries and being tied to a falling Euro as a result. This was evidenced on the weekend by a protest vote in a German by election which may well see the ruling party lose the seat and probably its control of the upper house.

3) It highlights the importance of remembering the basics. Don't focus on short term performance and the FOMO. (Not a relative of Godzilla. It is short for the fear of missing out).

3a) - I was once told by someone that the human brain only remembers a maximum of three things from a presentation.

What was 3a again... Ah yes, remember to have some diversification in your investment themes and defensive stock holdings. We are in a long period of economic transition and government balance sheets are stretched. There is a lot of nervousness and uncertainty out there folks and that ain't likely to change anytime soon.

Matthew Drennan
General Manager - Investments
Zurich Financial Services

To speak to a Zurich Investments Business Development representative please call 1800 004 480.

Important Information: The above information is general in nature, is dated 10 May 2010. It is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It does not take into account the personal financial circumstances, needs or objectives of any person. When making investment decisions we recommend investors consider seeking professional financial advice. Past performance is not a reliable indicator of future performance. Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511, 5 Blue Street North Sydney NSW 2060.

MDRN-004081-2010