While many thought that the world markets would recover strongly over 2011 it seems we have been stuck in a rut over the past few months with most investment markets tracking sideways.

While markets are often driven by fear and greed we cannot ignore the underlying economic factors that also serve to drive investment markets on a global scale.

Europe
Greece continues to cause concern for the Eurozone. While Greece accepted a bailout last year they are in need of another 12bn Euro's to repay maturing debt.
Unfortunately the country is experiencing trouble in trying to employ the austerity measures placed on them by the European Union and there is fear Greece will default. Greece has had its credit rating downgraded and is currently the world's least credit-worthy country.

Asia
China continues to battle inflationary pressures with little sign of easing. With 200 million people set to urbanise over the next 10 years (move from rural to city areas), it will be difficult to keep a lid on inflation. As these new city dwellers demand more and more of the necessities, such as food, prices will rise, causing further inflation.

America
While America is currently holding huge levels of debt (around $14 trillion of public debt), there is a general consensus that the World's biggest economy will right itself over the coming years.
While there is still need for tough policy, major changes are unlikely to occur until after the presidential elections late next year. This will constrain the US growth outlook and continue to put downward pressure on the $US.

Australia
Australia's interest rate remains at 4.75 percent but there is increasing pressure for the Reserve Bank to raise rates later this year. Inflation is close to the upper limit of three percent, and while anomalies like floods and cyclones may have pushed inflation above 3 per cent in recent months the RBA will closely monitor the situation to keep the economy in check. We remain firm that the RBA will increase rates later this year.
Australia recorded a Gross Domestic Product (GDP) figure of -1.2 per cent last quarter; its worst result since the height of the GFC. Upon further investigation we find that the primary cause of this negative result was the Queensland floods which cut supply of commodities, such as coal, to the
rest of the world. This meant we exported less over the quarter, causing a contraction in GDP.
While still above parity, the Australian dollar has fallen from its recent highs of $US1.10 to find itself hovering around $US1.05. With GDP contracting and overall softness in the commodity market a fall in the $AUD is to be expected however we still think that the dollar will stay above parity for the
foreseeable future.

Simon Curtain is a Private Client Advisor with Hewison Private Wealth:
Level 4, 102 Albert Road,
South Melbourne
Ph: 9682 1900
www.hewison.com.au