This recent devastation in Queensland has had a huge effect on the people of Queensland and its economy. Much has been spoken about the effects on Australia's economy - the losses from the damage and the growth from the clean up, but how does this affect you and your investments?

This article covers some of the effects of the disaster on the Australian sharemarket and your super balance.

The second part of the article gives a Global Outlook for 2011 and the assets they see with strong and weak growth potential.

QUEENSLAND FLOODS : The financial effects

The widespread flooding in Queensland has important investment implications for many sectors of the Australian sharemarket. The sectors that are most affected are the insurers, transport and retail.

Insurers

The most obviously affected sector is insurance where the flooding has both short and long term implications. The immediate impact is a fall in profits as insurers are forced to pay out on many policies. Within the sector, Suncorp has the largest market share in Queensland and is likely to be worst affected as it does provide flood insurance under its Suncorp branded policies. The cost to Suncorp is estimated to be at least $200 million at which time its aggregate reinsurance programme will be triggered and the remaining cost will be covered by its reinsurers. There is also the possibility that Suncorp's banking arm will be significantly affected as many of its clients are small and medium size enterprises in rural and regional Queensland. Interest holidays may be required to subsidise companies that have been inundated and falling property prices in some flood prone areas may impact Suncorp's lending book. Suncorp's share price has fallen 5% so far this year.

The impact on IAG and QBE is relatively minor as neither of these companies insure against flood damage in Queensland, their rationale being the lack of availability of state-wide flood zone mapping from the Queensland government. However, this lack of cover looks set to become a major on-going political issue that has the potential to affect the industry's approach to flood cover in the future.

Given this is only the start of the wet season in Queensland, there is a risk that further heavy rainfall could create more flooding, hence significant uncertainty over the outlook for the insurance sector remains. The cost of reinsurance is also likely to rise and as a result, retail premiums will undoubtedly be higher next year as the insurers try to cover cost increases.

Transport

The key difference between the transport sector and the insurance sector is that the impact of the floods on transport should be transitory, hence share prices are unlikely to be remain depressed for an extended period.

Rail companies QR National and Asciano, transport coal from Queensland coal mines to the ports. These companies have experienced some disruption to coal supplies as mine production has slowed. Capacity constraints on the rail lines are likely to prevent these lost volumes from being made up at a future date. QR National has been the worst affected for several reasons:

• it is the incumbent rail company and many of its older contracts do not contain any form of protection for shareholders in the event of supply disruptions;

• the supply disruptions have impacted a large percentage of the company's operations, given its Queensland focus;

• QR National owns the infrastructure that it uses, including the rail lines which have been impacted by the floods and may need repair which will cost QR cash. For example, the Blackwater line will not open until later this week and it is impossible to tell how bad the damage will be until the water recedes.

By contrast, Asciano is better placed as it does have some protection for share holders written into many of its contracts, it does not own any infrastructure and this is a growth market for the company, not its core business.
Other transport companies that have been affected include:

• Toll Holdings - This company has a large franchise in North Queensland and the closure of the highway that
services Rockhampton has impacted volumes.

• Qantas and Virgin Blue - The floods have resulted in many people cancelling Queensland holidays and Brisbane airport was also closed for several days. This is likely to have a near-term impact on airline earnings.

Retail

North Queensland is a relatively small retail market but Brisbane is much larger and more significant from a corporate perspective. Widespread damage to retail stores in the Brisbane area, lost sales and financial losses that impact family budgets will clearly affect earnings in coming months but overtime some of this is likely to be offset by "catch up" buying after the clean up is completed.

Bunnings Warehouse is likely to benefit from the floods as the company is a major supplier of items that will be used in the clean up operations and they should also experience increased demand for hardware items once repairs and rebuilding get underway.

Food prices are expected to rise, particularly for fresh fruit and vegetables that have been destroyed by the flooding. Historically, periods of higher food prices are associated with improved supermarket earnings.

Finally, the floods' negative impact on overall economic growth is likely to keep the Reserve Bank of Australia on hold with monetary policy in the near-term. This is positive for retail sales outside of Queensland and may contribute to stronger consumer demand in 2011.

AVIVA INVESTOR STRATEGY TEAM 2011 GLOBAL OUTLOOK

• The strength of recent data means fears that the US could be poised to slide back into recession have disappeared and while growth in Asia is slowing, it is not doing so as quickly as some had predicted

• Although the situation is less clear cut in Europe, with the economies of several nations such as Spain and Ireland in poor shape, thus far that has failed to derail a strong revival in the fortunes of the region's economic powerhouse, Germany

• Despite these improvements there are, of course, reasons to be concerned. In the US, the housing market remains in a sick state while the Eurozone looks set for further turmoil as several countries struggle with unsustainable deficits and overall debt levels

• Inflation is a growing menace in a number of countries, particularly in Asia and Latin America, which have been importing inappropriate US monetary policy

• The outlook for riskier asset classes such as equities and corporate bonds appears favourable. However, the same cannot be said for sovereign debt markets

Recent weeks have seen the release of a string of better than expected economic reports giving grounds for optimism over the global outlook for 2011. In the US, data on retail sales, jobless claims and GDP have all pointed to a pick up in the pace of activity. German business confidence is at its highest level in more than 20 years while myriad countries stretching from the UK to South Korea are experiencing an export boom.

We see US economic growth quickly returning to its trend rate of around 2.75% and staying there for the next two years, underpinned by rising incomes and consumer confidence. The fiscal package that has recently been agreed should support spending growth to some extent. Furthermore, a significant tightening of fiscal policy within the next two years looks unlikely.

But coming after such a deep recession, such a recovery would be disappointing by historical standards. The trouble is that increased labour market flexibility means employers now rely more heavily on productivity gains in the early phases of an upturn than they used to. So the labour market is unlikely to grow as strongly as it did in previous recoveries prior to 1990.Investors Market Monitor
Tuesday 18th January 2011
Meanwhile the housing market remains in a fragile state. The huge amount of foreclosed housing stock, combined with forthcoming resets for mortgages that were originally offered with very low introductory rates, could prompt a renewed fall in house prices.

That said, it is Europe which is the biggest unknown. Germany looks to be in rude health and could easily grow by two per cent in 2011 having expanded at an even faster pace in 2010, aided by strong demand for the country's capital goods, along with rising domestic consumption. But while other northern European nations' economies appear to be in a relatively healthy state too, much of the rest of the continent remains in difficulty.

Unable to devalue their currency, several Eurozone members are being forced into severe fiscal austerity measures in an effort to balance their books. This in turn is leading to a sharp contraction in economic output. A default, debt restructuring or even some form of break-up of the currency union cannot be ruled out. That could potentially spark a second wave of the financial crisis as banks are forced into a fresh wave of write-downs on their holdings of these countries' debt.

We are more optimistic with regard to the outlook for Asia. Growth has certainly slowed in recent months due to the impact of weaker US output over the summer and tighter Asian monetary policy. But the slowdown was from exceptionally high levels seen in the first half of the year. For the region as a whole, we expect activity to rise around six per cent in both 2011 and 2012.

Within that total, there will, of course, be variations by country. China should successfully use a mix of policy measures to slow activity, so that GDP grows around nine per cent in 2011, slowing to six per cent in 2012. If that's right, inflation should fall to 2.9% in 2012 from 3.6% next year. Japan is likely to remain the weak spot, managing growth of only two to three per cent, with India and Indonesia at the other extreme due to their reluctance to raise rates quickly enough. The continuation of strong Asian growth should in turn be good news for resource countries such as Brazil and Australia.

Aside from a potential European sovereign debt crisis and a renewed slide in US house prices, the main risks to our forecasts come from inflation. Prices have been rising sharply throughout Asia and emerging economies due to these countries importing inappropriately loose monetary policy from the US. That they have done so is largely explained by their desire to prevent increased capital inflows from pushing up dollar-linked exchange rates too fast, thereby hurting competitiveness.

But many of these countries should have been raising rates aggressively. The consequence of not having done so could be a sharp rise in Asian asset valuations and commodity prices. In turn, that could push inflation up in the West and present central banks with a policy dilemma - namely the need to raise rates to curb inflation when demand is insufficient to support reasonable employment growth.

Against this economic backdrop, our strategy team believes riskier asset classes such as shares and corporate bonds will generate reasonable returns for investors in 2011. That said, volatility could be elevated given continued uncertainty over the economic outlook and concern over the state of various governments' finances. Equities look attractive particularly when compared to risk-free interest rates. Although they look somewhat overbought from a technical standpoint, fundamentals are supportive in view of the likely further improvement in the economic backdrop, the prospect of a more business-friendly US administration, and given the fact the bulk of investors remain underweight of the asset class.

Regionally, Europe remains our least preferred market. We remain positive on Asian markets although we recognise that policy tightening poses a growing risk in the region. Nevertheless, strong profit growth, lower debt burdens and strong domestic demand should prove beneficial for both equity and currency markets. UK equities should benefit from an undervalued currency as well as reasonable valuations, whereas in Japan institutional flows into the equity market remain robust and momentum now appears to have gained traction.

Corporate bonds still look attractive given the health of companies' balance sheets. Although the scope for further capital gains stemming from a renewed compression of yields relative to those of underlying government debt may be limited, the asset class is still attractive on a yield, or sustainable-return, basis after adjusting for the costs associated with potential defaults. Cash balances are at record levels as companies refrain from investing or hiring owing to a lack of confidence the recovery will be sustained.

Risk-free interest rates should remain relatively low by historical standards, while we see continued strong demand from pension funds in view of long-term demographic trends, namely ageing populations in the West. So although low yields make credit less attractive over the medium term than a year ago, we are positive on the asset class in the short term reflecting healthy balance sheets and continued strong demand for the asset class as the search for yield persists.

In summary, although the various threats we have identified may lead to higher volatility, the prospects for riskier assets are, on balance, still attractive. Long-term sustainable returns are reasonable for both equities and corporate bonds. However, the same cannot be said for sovereign debt markets. Since the Federal Reserve on November 3 said it would pump more money into the US financial system bond yields have risen sharply. Given rising global inflation, not to mention the parlous state of many western countries' public finances, government bond markets look vulnerable to further declines.

That said, we do not see a major sell off given that yields have already risen sharply and in view of the likelihood that monetary authorities will if necessary take action to suppress yields. Within government debt markets, our strategy team has a preference for higher yielding Australian and UK bonds relative to ultra-low yielding Japanese paper.

_{The above information is of a general nature and has been prepared without taking account of your individual investment objectives, financial situation or particular investment needs. It is not intended as financial advice to retail clients. Before making an investment decision, you should consider the appropriateness of the information, having regard to your objectives, financial situation and needs. We recommend you consult with your financial adviser, who can help you determine how best to achieve your financial goals and whether investing in a fund is appropriate for you. Aviva Investors Australia Limited ABN 85 066 081 114. AFS Licence No. 234483. Level 28 Freshwater Place, 2 Southbank Boulevard, Southbank 3006 GPO Box 2007, Melbourne VIC 3001 Telephone: (03) 9220 0300 Facsimile: (03) 9220 0333 Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it Website: www.avivainvestors.com.au Part of the nternational Aviva plc group.}