Market Update

Global equity markets have performed poorly over April and May due to renewed concerns over Eurozone sovereign debt issues.  Key issues remain – will Greece maintain the Euro currency and will Spain be able to continue to meet its debt obligations.  Some key developments influencing markets at the moment include:

  • The International Monetary Fund (IMF) latest forecasts upgraded world growth to 3.5% in 2012 and 4.1% in 2013 (April 2012 release).
  • US GDP growth in the March quarter 2012 was 2.2% pa (slightly below expectations).
  • US unemployment continued to fall as the rate dropped to 8.2% in March 2012 (down from 8.3% the previous month).
  • The Reserve Bank of Australia (RBA) reduced interest rates by 0.5% in April to an official rate of 3.75% pa, due to economic conditions being weaker than expected.  The change was supported by an annual inflation figure of 1.6% for the year ending 31 March 2012.
  • Australian unemployment rate was lower at 4.9% in April 2012.  This low rate was surprising based on many of companies announcing job cuts in 2012.
  • China’s economic growth for the year ending 31 March 2012 was 8.1% pa (down from 8.9% pa). Recent data reveals that economic growth is likely to slow further in 2012 and a number of measures are being considered to stabilise growth at between 7-8% pa.
  • Global rating agencies downgraded the credit ratings of Spain from A to BBB+ due to a deteriorating economic outlook.  Spanish unemployment rose to 24.4% in March 2012 and GPD growth was -0.3% for the quarter.

Table – provides Spanish and Italian 10 year bond yields over the last 2 years.

 

European Outlook & Greece’s Options

The Eurozone remains at a crossroad.  The outcome of the Greek election (17th June 2012) will determine which path is taken next.

The two key outcomes at the moment appear to be:

  1. Greece re-commits to EU rescue package:
  • Expect this to be a positive outcome in the short term for Greece and Global markets,
  • Risks reduce as Greece avoids shock of Euro currency exit,
  • Concessions may be granted to Greece to balance austerity with growth initiatives,
  • Expect an easing of EU economic, financial and political tensions.

2.  Greece ceases utilising EU rescue package:

  • Expect this to significantly increase the risk of a European credit crisis in the short term,
  • Greece will exit the Euro currency and go back to having its own currency,
  • Expect Greece’s currency to depreciate significantly (maybe up to 50%), resulting in potential debt defaults and in future increasing Greece’s international competitiveness,
  • The EU will have to review key policy measures such as Eurobonds, European Central Bank action, deposit insurance, and bank recapitalisation.

The Greek issues highlight the fact that the European Sovereign debt issues cannot be solved by austerity measures alone.  Consensus views have shifted towards the idea of a set of growth initiatives which may include infrastructure projects and supply side initiatives (labour reform, tax incentives).

We expect further announcements during 2012 concerning Europe’s new policy mix.

 

The mood in equity markets is now very fragile with 1-3% daily market moves occurring more often. Overall, global corporate expectations are mixed.  Equity markets remain cheap due to the higher prevailing market risk.  Equity markets are now at the low end of our expected 2012 trading range for the ASX 200 (4,000 to 4,800).

 

The next section of this newsletter provides an overview of market action in major asset class for the month of April 2012. 

Australian Shares

The local market recorded a fourth consecutive month of gains in April, with the S&P/ASX 200 Index returning +1.4%.  Investors favoured stocks with higher yield, supporting demand for telecommunications, health and property trust stocks.

The resource sector (and related mining services) reported strong activity levels, while conditions remain more subdued in other parts of the economy.

Overseas Shares

Most global equity markets posted losses in April, driven by investor outflows into safe haven government bonds (notably US and German), rising sovereign debt concerns and weaker data in the US.

The MSCI World Index returned -1.4% in US dollar terms and -1.8% in $A terms.  The S&P 500 index returned -0.8%, while the NASDAQ returned -1.5%.  This was despite strong US corporate earnings for the quarter ending 31 March 2012.

European markets were down – Spain down sharply (-12.5%), the German DAX 30 down (-2.7)%, the French CAC 40 down (-6.2%) and the UK FTSE 100 was also down (-0.5%).

In Asia, markets were mixed with Japan down (Nikkei -5.6%).  Chinese markets were stronger (+7.8%) on expectation of renewed policy easing. The Hong Kong Hang Seng was up 2.6%.

Emerging markets performed broadly in line with the main global equity markets, declining 1.9% in $A terms.

Property

Domestic REITs as measured by the benchmark S&P/ASX 200 A-REIT Index finished the month up 5.5%. Global REITs appreciated 2.5% (as measured by the FTSE EPRA/NAREIT Developed Index) on a fully hedged basis.

Fixed Interest

In April 10 year US Treasury yields fell back below 2% due to renewed concerns about European sovereign debt risk, an economic slowdown in China and softer US economic data.

The resurgence in concerns over negative consequences of Austerity measures in Europe pushed Spaning bond yields above 6% for the first time since January 2012.

In Australia, Commonwealth 10 year bond yields declined to 3.67% at the end of April (4.08% at end of March).

Domestically, lower than expected March 2012 inflation and a weakening Australian economic outlook heightened expectations of the RBA rate cut which was delivered in May 2012.

Australian Dollar

The Australian dollar appreciated against the US dollar (+0.8%) in April.  However, the Australian dollar has subsequently fallen significantly during May as a result of the RBA interest rate cut and the European sovereign debt issues and currently trades around 0.98c against the US dollar.

 

 

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