Hunt Hall warns of potential for 'death spiral'

Investment company Hunter Hall Global Value Limited has posted a strong result for the six months to December 31 on the back of solid performances from both its Australian and international investments.

The company has told the Australian Securities Exchange that it recorded a net profit after tax of $37.7 million with net after-tax assets increasing from $266.9 million as at June 30 to $294.9 million.

The company said it recorded an investment return of 21.6 per cent for the period and, in doing so, outperformed its MSCI World Total Return Index.

However, in discussing the outlook, the company said the world economy and markets were in a highly vulnerable position.

“Many international stock markets have enjoyed strong performance in 2009 as a result of the successful rescue of the global banking system and huge stimulus applied to prevent economic slowdown,” the company said. “The price for this action has been an increase in the net public debt of most of the large Organisation for Economic Co-operation and Development economies to dangerous levels.

“What worries us is that interest rates are low and any increase in rates combined with a ‘double dip’ recession (implying lower tax revenues and higher spending) would put some key countries into a situation where debt service takes up a much larger proportion of government spending,” the Hunter Hall analysis said.

It warned this could lead to a “death spiral” where lenders demanded higher interest rates to balance the increased risk of lending to a poor credit and the pressures escalated until the country was forced to declare bankruptcy.

Hunter Hall said its response to this environment would be to maintain fairly high liquidity and to be vigilant in selling shares that could no longer be justified in portfolios on valuation grounds.