>Aussie dollar and stock market fall off a cliff!

What is going at the moment? As an investor I am getting destroyed in the US and Australian stock markets, plus the exchange rate is doing me no favours since most of my savings are in Australia. The Dow Jones (US stock market average) has fallen by more than 12% this week, with the ASX down even more sharply by about 15%. The reasons for this market capitulation are simple, fear and uncertainty. Investors, especially professional traders, have lost all confidence in the market due to the twin threats of a frozen credit market freeze (i.e. banks are hoarding rather than lending money) and an impending global recession. Until the uncertainty is resolved in US and global markets, the Australian stock market has little chance for recovery any time soon.

The Australian dollar has been caught in a perfect storm as well. The global resource boom driven by China and India drove our stock market and dollar to very high levels over the last few years, but with a global recession around the corner and a fall off in the demand for our resources – the tide has swiftly turned. Further, the rapid cutting of central interest rates by the Reserve bank, with more to come, has meant that the yield differential between Australia and other countries has narrowed significantly, making investing in Australia less attractive for foreigners. Added to all this, the flight to safety towards the US dollar and Japanese Yen, has basically crushed the battling Aussie dollar which has lost more than 30% in value over the last month alone.

Outlook and What to do

Unfortunately there is nowhere to hide. If you are invested in the stock market and don’t need the cash right now your best bet is probably to ride out current stock market tsunami and hope that stocks recover. Otherwise keep your savings in cash at one of the many high interest savings account available (HSBC and ING are my recommended ones). A 6% risk free return is better than a -20% return. The Australian dollar is not going to recover anytime soon either, but should go back towards US$ 0.75 once things calm down a bit. Also, keep investing in your superannuation, because it is your most effective form of long term investment and the benefits of dollar cost averaging should mean you should come out fine in a few years. In the event that economic conditions get worse, make sure you pay down debt now, build up at least 6 months of emergency funds and starting cutting back on discretionary expenses where you can. Tough times are ahead and it is best to be prepared for the worst.