Market Update

Global markets have kicked off 2012 in a positive fashion.  After a poor 2011 there seems to be a cautious optimism flowing through to equity markets. Some significant developments influencing markets at the moment include:

  • US corporate reporting for the quarter ending 31 December 2011 was reasonable, although slightly below expectations.
  • Australian corporate earnings reports for the half year to 31 December 2011 were  generally good, with most companies delivering earnings in line with or better than expectations.  Results from the retail sector, however were generally below expectations.
  • US economic indicators are pointing to growth of between 2-3% pa year on year, and showing improving employment conditions.
  • Greece agreed to all the conditions required to receive the next stage of its bailout funding and be granted a significant debt write down on some long term debt by the private sector.
  • Market yields on European sovereign bonds have stabilised and reduced from the levels seen in late 2011.
  • Further downgrades by rating agencies of European countries and European banks have been put in place, reflecting the higher risk of potential default.
  • Chinese inflation has showed signs of moderating, resulting in some reduction in government reserve requirements, thus enhancing the credit available.

We believe in the short term, that global equity markets will trade in a range of +/- 10% due to some positive economic indicators balanced by the continued issues associated with high sovereign debt in the developed world and greater austerity measures being put in place in Europe and the US.  We expect global growth to continue at a slower pace in 2012, mainly due to a likely recession in Europe.  Australia remains well positioned to continue to grow at around 2-3%.

Equities remain cheap on key historic valuation metrics, however if the debt crisis in Europe and the US starts to get worse, equity markets may retreat from their current position in the short term.

The remainder of this newsletter provides an overview of market action in major asset class for the month of January 2012. 

 

Australian Shares

After a tough 2011, the S&P/ASX 300 Index returned +5.1%.  Large Cap stocks (+4.7%) unperformed their Mid Cap (+6.2%) and Small Cap (+7.8%) counterparts.   At the sector level, the cyclical sectors were strongest. Materials (+10.3%), Energy (+8.4%) and Industrials (+6.3%). Underlying the performance of these sectors, were strong returns from Fortescue Metals (+18.4%), Rio Tinto (+14.9%), Newcrest Mining (+14.0%) and Woodside Petroleum (+12.2%).

Overseas Shares

In local currency terms, The MSCI World ex Australia Index returned +4.3%.

Emerging markets were the best performing asset class, returning +7.4% for the month. In the US the S&P 500 returned +4.5%, the Dow Jones was up 3.6% and the NASDAQ up 8.0%.

In Europe the FTSE 100 (UK) returned +2.0%, the DAX 30 (Germany) +9.5% and the CAC 40 (France) + 4.4%.  In Asia, the Hong Kong Hang Seng was up 10.6%, the Chinese Shanghai Composite Index up 4.2% and Japanese TOPIX returned +3.7%.

Property

Domestic REITs as measured by the benchmark S&P/ASX 300 A-REIT Index finished the month up 5.4%. Global REITs appreciated 7.1% (as measured by the FTSE EPRA/NAREIT Developed Index) on a fully hedged basis.

Fixed Interest

The local UBS Australian Composite Bond Index returned +0.1%.  In terms of overseas bonds, the Citigroup World Government Bond (ex-Australian) index gained 1.0% during the month and similarly, the Barclays Capital Global Aggregate Bond Index appreciated 1.3%, both on a fully hedged basis.

Australian Dollar

The Australian dollar appreciated against all major currencies returning +2.1% against the Pound Sterling and +2.8% versus the Euro, +3.7% against the US dollar, and +2.7% against the Yen.  On a trade-weighted basis, the Australian dollar appreciated 2.8% during January.

Australian Residential Property

Australian residential property prices declined by 4-5% on average during 2011.  This likely understates the true decline which varies significantly by city, suburb and property type.  Key drivers of property prices include affordability, availability of credit, business and consumer sentiment, interest rates and the global economic environment.

We have included some key graphs from the Reserve Bank of Australia which provide some indicators on the state of Austrian residential property.

 

 

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