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Economic and Investment Update - January 2014

by Brendan Gallagher

The December quarter has been another topsy turvy one, thankfully finishing on a high. As we’ve now moved into the New Year it is pleasing to see that this past quarter has capped off one of the best years for investment performance of equity markets in Australia and around the world.

Economic News

Australian economic growth measured by Gross Domestic Product (GDP) slowed last year from 2.5% to 2.3%, year on year to the end of the third quarter.1 This can be attributed to a number of factors, such as private consumption and investment coming in at below par; and fiscal tightening by the government affecting their input into Australia’s national growth. Although there was strong recent labour market growth, which saw the unemployment rate tick up to 5.8%.

In the United States, the employment rate, retail sales, housing sector and overall economic growth continue to improve.2 Employment numbers in particular have surprised on the upside with an average of 204,000 new jobs created in each of the past four months, seeing the unemployment rate fall from 7.3% to 7.0%. The slow rate of growth of business investment is probably the standout negative of an economy otherwise on the rise.

The Federal Reserve announced in December that they would begin tapering their bond purchasing program from $85 billion per month to $75 billion per month, commencing in January 20143. The Fed also indicated that this moderate approach to tapering would continue during 2014, but only as long as economic conditions continued to improve.

In the Eurozone, growth is harder to come by. Growth is accelerating, albeit at a slow pace, in many parts of northern Europe including Germany, Austria and the Netherlands although a number of southern European countries including France, Italy and Spain have contracted.

The outlook for the UK is positive, with manufacturing and service sectors enjoying stronger growth; leading to increased employment and economic growth.

Investment Markets
(source of investment figures – Van Eyk Investment Market Report Australia January 2014)

They often say in a game of football that it was a game of two very different halves. The same can be said of the Australian share market in December. It fell sharply in the first half, losing 4.7%, off the back of concerns over the outlook for the Chinese economy, future direction of the Reserve Bank of Australia and general lack of confidence in the Australian economic outlook. QBE lead the insurance sector which lost 15% early in the month. Banks and retailers also contributed to the market slump.

The Australian market then enjoyed resurgence in the second half putting on 5.7% for a strong recovery. This backflip occurred off the back of improved domestic job numbers, improved sounding from China on stimulus and improved equity markets overseas. Over the December Quarter the broad Australian equity market (ASX 300 accum) rose 3.37%.  

International equities (MSCI World) continued to power along gaining 2.28% in December and 29.2% for the year. For Australian investors who invested in un-hedged international equities, these returns were turbo boosted by the depreciation of the Australian dollar against major foreign currencies. In Australian dollar terms international equities returned 4.48% for December and 47.9% for the year. Incredible returns that are unlikely to be repeated in 2014, although the continued depreciation of the Australian dollar may continue to boost un-hedged international equity returns over the coming year.

Some of the performers for the year were the United States, Germany, Spain and The Netherlands. The standout sectors for the year were Consumer Discretionary (59.86%), Health (56.2%) and the Industrial (51.36%) sectors.

If we look at a number of the major asset classes (see table below) we can see that the one year performance of most of the growth assets (equities and property) have been very strong, in fact some of the best yearly performance figures in many years. The longer term figures of these asset classes are also interesting. 

Investment Performance as at 31 December 20134

Asset Class

1 year

5 years 
(per annum)

International Equities (MSCI World AUD)

47.93%

9.36%

International Equities –Hedged (MSCI World)

29.12%

17.43%

International Equities – Small Companies (MSCI World Small Cap)

33.24%

18.40%

International Equities – Emerging Markets (MSCI EM Index AUD)

12.95%

9.24%

Australian Equities (ASX300 Accum)

19.68%

12.33%

Australian Equities –Small Companies (ASX Small Ord Accum)

-0.76%

8.14%

Listed Property (ASX 300 AREIT Accum)

7.27%

8.82%

Fixed Interest (UBS Composite Bond Index 0+Yr )

1.99%

5.77%

Fixed Interest (UBS Govt Bond Index 0 + Yr)

0.27%

4.29%

Fixed Interest (ML Corporate Bond Index AUD Hedged)

2.10%

9.25%

Gold Bullion (USD)

-28.04%

6.45%

Cash (RBA Cash Rate)

2.73%

3.74%


The past five years has probably felt worse from an investment perspective than has actually been the case, more likely the result of the media emphasising some of the large short term falls that we’ve experienced over this period, without necessarily emphasising the large investment market pick-ups. For example, if international share investments had fallen 47.93% during the past year, it would be on the front page of every newspaper, headline of television news etc. And not just for one day, this would be reported for a long period. Hands up if you saw a headline reading, the “positive 47% for the past year”? No surprises there.

The outlook for the year ahead is perhaps more sombre for the Australian share market, but international equities, particularly with the expected further depreciation of the Australian dollar, offer some scope for strong returns, albeit, not at the break neck speed of the past 12 months. The fixed interest and cash sectors offer subdued performance and property is likely to be somewhere in between.    

 

1 Australian Bureau of Statistics www.abs.gov.au
2 Van Eyk Investment Outlook Report (Australia) December 2013. Page 8
3 The Guardian 19 December 2013 – “Federal Reserve to Taper Economic Stimulus on Heels of Strong Jobs Growth”
4 Van Eyk Investment Market Report January 2014 page 4

 

January 28, 2014
Category: Latest News
 
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