Market Update

The 2011 calendar year was a poor year for equity markets. The ASX 300 returned -11% for the year.  During December global equity markets held up largely due to:

  • the EU (excluding UK) agreeing to stricter government deficit rules (to reduce the rate of growth of sovereign debt).
  • US economic indicators pointing to growth, lower unemployment and some improvement in the housing market.
  • China starting to loosen key policy measures such as bank reserve requirements.
  • Lower global inflationary pressures due to falling commodity prices.

The key economic themes for 2012 will be:

  • Fiscal austerity and deleveraging in Europe and the US resulting in slower growth in these regions (and potentially recession in Europe).
  • Monetary reflation with quantitative easing (i.e. central banks buying Sovereign bonds to keep interest rates low) in Europe, the US and Japan.
  • Emerging Markets continuing to account for the majority of global growth, which is expected to be 3%.

The key risks that remain for 2012 include:

  • Europe fails to reflate economic growth sufficiently resulting in a deep recession and possible break up of the Euro as a currency.
  • The US fails to extend payroll tax cuts and unemployment benefits (resulting in lower incomes and lower growth).
  • China eases too slowly to prevent a property crash and a significant slow down in growth.
  • Middle Eastern instability resulting in a significant jump in the oil price.

The key indicators to monitor include:

  • Following on from the Greek experience, the level of Italian and Spanish Government 10 year bond yields (less than 6% is good, more than 7% is bad).
  • Chinese money supply growth rates which were at a low of 10% recently (less than 10% is a concern).
  • US ISM manufacturing index (broadly over 50 is usually a lead indicator of economic growth).
  • The $A exchange rate is a good indicator of global growth (above US$1.00 is positive).
  • Trend in overall US unemployment.

The key to global growth remains the Emerging world. Some key reasons the emerging world remains healthy and is expected to grow, include:

  • Low private and public debt levels.
  • Low per capital income with the potential to grow quickly through urbanisation and industrialisation.
  • Inflation falling, enabling lower official interest rates to further stimulate growth.

We believe in the short term equity markets will continue to be flat and weighed down by the key economic themes and risk mentioned above.  We expect global growth to continue at a slower pace in 2012, mainly due a likely recession in Europe.  Australia remains well positioned to continue to grow at around 2-3% with the ability to stimulate the economy through lower interest rates and/or some additional government spending.

Equities remain cheap on key historic valuation metrics, however if the debt crisis in Europe and the US gets worse, equity markets are likely to continue to fall in the short term.

Significant Economic/Market Indicators during November and December 2011

In December, the Board of the Reserve Bank of Australia decided to reduce the cash rate by a further 0.25% to 4.25%.  Looser monetary policy should stimulate demand further in 2012.

  •  Australian unemployment increased slightly to 5.3% in November 2011.  The trend is currently up.
  •  Rating agencies have put some European countries on negative watch and some credit rating downgrades were issued.
  •  European leaders agreed to stricter budget rules and bilateral loans to prop up weaker Eurozone countries.
  •  China’s central bank lowered the reserve requirement for local lenders in response to slowing manufacturing activity.  
  •  Commodities prices were lower with oil down 1.5% and gold down 9.8% for the month of December 2011

 The remainder of this newsletter provides an overview of market action in major asset class for the month of December 2011. 

Australian Shares

The local market ended the final moth of the calendar year down, with the benchmark S&P/ASX 300 Index returning -1.4% for the month to finish calendar year 2011 down 11.0%.  Large Cap stocks (-1.0%) outperformed their Mid Cap (-2.3%) and Small Cap (-4.3%) counterparts.

At the sector level, the slowdown in global growth and soft consumer demand put downward pressure Materials (-4.1%) and Energy (-5.1%) stocks, which were the largest negative contributors to performance for the month.  Newcrest Mining (-14.4%), Woodside Petroleum (-6.3%) and Rio Tinto (-4.1%) were notable stocks that saw their share price fall with the negative market sentiment.  On a positive note, Financials (+0.6%) and Telecommunications (+5.1%) benefited from the flight to quality, with Commonwealth Bank of Australia (+3.8%) and Telstra (+6.2%) shareholders enjoying modest gains.

Overseas Shares

The fortunes of overseas investors were mixed, with North America (+0.8%) and the Far East (+0.9%) posting positive returns, whilst Europe (-1.3%) and Emerging Markets (-0.1%) all had negative months, as measured by the MSCI World ex Australian Index, in $A terms.  On an unhedged basis, the MSCI World ex Australian Index returned +0.2 in $A terms, whilst in local currency terms the index returned +0.7%.  Based on the S&P Developed ex-Australian Large Value and Growth Indices, Value stocks (+0.7%) outperformed Growth stocks (-0.3%) in $A terms.

Property

Domestic REITs as measured by the benchmark S&P/ASX 300 A-REIT Index finished the month down 2.6%. In contrast to the local market, Global REITs appreciated. The FTSE EPRA/NAREIT Developed Index returned +1.6% on a fully hedged basis.

Fixed Interest

The local UBS Australian Composite Bond Index returned +0.8%.  Overseas, the Citigroup World Government Bond (ex-Australian) gained 2.1% during the month and similarly, the Barclays Capital Global Aggregate Bond Index appreciated 1.9%, both on a fully hedged basis.

Australian Dollar

The weakness in the European economies relative to Australia was highlighted in the performance of the relative currencies. The Australian dollar returned +1.0% against the Pound Sterling and +3.5% versus the Euro, -0.2% against the US dollar, and the 1.1% against the Yen.  On a trade-weighted basis, the Australian dollar appreciated 1.6% during December.

 

GENERAL ADVICE WARNING
© 2012 Harvest Financial Group Pty Ltd. This Newsletter has been prepared for clients of Harvest. This document contains confidential and proprietary information of Harvest Financial Group (‘Harvest’), and is intended for the exclusive use of the recipient to whom it is addressed. The document, and any opinions on investment products it contains, may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity without Harvest’s prior written permission. Information on investment management firms contained herein has been obtained from the firms themselves and other sources. While this information is believed to be reliable, no representations or warranties are made as to the accuracy of the information presented, and no responsibility or liability, including for consequential or incidental damages, can be accepted for any error, omission or inaccuracy in this report or related materials. Opinions on investment products contained herein are not intended to convey any guarantees as to the future investment performance of these products. In addition, past performance cannot be relied on as a guide to future performance. This information has been sourced from Harvest’s independent research house Mercer Investment Consulting Research and other sources.