Batten down for prolonged fallout – van Eyk

Stephen van Eyk

The sub-prime mortgage saga will most likely take years to play out and investors would be wise to tailor their strategies to a slowing global economy and extended bear market, according to van Eyk Research’s Stephen van Eyk.

Speaking at the SMSF Professionals’ Association of Australia national Conference in Brisbane yesterday, van Eyk said financial debt in the United States had increased massively relative to gross domestic product over the past 10 years and showed no signs of abating. He said although US-based consumers will continue to need to borrow funds, tighter credit markets and a rising unemployment rate among other things mean more are likely to default on their loans.

Van Eyk said that because consumer spending in the US contributes about 70 per cent to economic growth, it should already be regarded as in recession.

He said US corporate earnings are already being revised into negative territory and are likely to plummet further still over the next year.

European economies are also weak, he stressed, and rising Chinese export costs are driving inflation elsewhere, including here in Australia.

As a result, van Eyk said he expects investments not directly affected by financial markets to increase in popularity in 2008.

He was pessimistic about the prospects of small cap stocks globally and Australian-based listed property trusts, believing the latter would continue to struggle with rising interest rates.

He said equities fall for an average of six months after a recession and that the market could be expected to rise again by late 2008.

He said investors should expect returns on shares of about 8 per cent to 9 per cent over the next 10 years, certainly not the double-digit returns seen more recently. Considering rising inflation, he expected fixed interest returns to be lower.