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Market Commentary

by Matthew Congiusta

The past few months have been particularly eventful with global politics and monetary policy having their effect on investment markets. Recently, we have witnessed a new Australian Government, President Obama considering a military strike on Syria and most notably the US Federal Reserve (Fed) surprise with its decision ‘not’ to taper its quantitative easing program. China and Japan continue to have a number of issues to contend with, heavily impacted by government decision; and at last Europe has pulled itself out of recession.

With the much anticipated Australian Federal election behind us and the new Abbott Government in the driver’s seat, it is natural to wonder about the impact, if any, this might have on investment markets. During the campaign and lead up to an election, there is a justified feeling of uncertainty amongst the general public. Investors don’t like uncertainty, this can lead to inactivity and historically we have seen the Australian share market ‘flat lining’ in the run up to elections. Once the poll is out of the way, evidence suggests there is often a feeling of optimism which can have a short-term impact on the Australian share market. History shows that over the last 30 years, there is often a relief rally soon after a Federal election is over, for the next few months1.

This year, immediately following the election we have witnessed a boost to confidence from the change in government, evidenced by higher readings for consumer and business confidence, a rally in the share market and rise in the Australian dollar. Of course, we must keep in mind that there are other significant factors impacting the Australian share market, some of which are mentioned below.

In the US, with signs that a diplomatic solution will be found for Syria, it was the addition of the Fed’s surprise decision to retain its $US85 billion monthly bond buying program which had investors cheering. The immediate effect of this announcement saw commodity prices higher and the Australian dollar surging back above US95c2. This may increase the pressure for the Reserve Bank of Australia to cut interest rates even further or at least keep them at current levels, a 53 year low. The US S&P 500 index remains at all time high levels and locally the Australian share market at 5 year highs.

There had been almost uniform consensus that the Fed would begin scaling back its monthly asset purchases; Wall Street had fully priced in the prospect of a $10-$15 billion tapering in the bond-buying program3. It is likely the Fed’s tapering will now be postponed until next year, or at least late this year. Rising mortgage costs and the “tightening of financial conditions” were cited as reasons for the delay.

In Japan, as anticipated the government won a convincing victory in elections for the upper house and is now in charge of both houses of parliament for the first time since 20074. Prime Minister Shinzo Abe must soon decide whether to allow the first phase of a planned increase in the national sales tax to go ahead. Some years ago, a hike in the sales tax saw negative effects on the Japanese economy. The fear is that this might occur again, sending the economy back into recession. Although the recent growth rates have reduced the fear factor, there is growing concern that Japanese government debt must be addressed soon, passing the “quadrillion” level in June.

In China, despite the sharp rise in interest rates in June due to the Chinese central bank-engineered credit crunch aimed at reining in the speculative lending in the “shadow” banking system; economic conditions in China settled during July-August. Economic data was generally positive with industrial production, exports and money supply growth exceeding expectations.

The second quarter saw a slowdown in GDP growth to 7.5%6 as the new administration has made its objective clear, to improve the “quality” of growth, rather than the quantity, with an emphasis on reform and restructuring the economy.

Finally, the Eurozone has pulled itself out of a one and a half year recession, with the economies of Germany and France growing faster than expected in the second quarter. The increased pace was primarily driven by renewed business and consumer spending5. However, there are still struggles ahead with Spain and Italy remaining fragile. It is expected that it will be a couple of years until we see the Eurozone return to healthy, sustained growth rates.

Australian Equities

After the slight correction commented on in our last ‘Market Commentary’, the Australian share market has maintained its upward trend with the ASX 200 Accumulation Index at 5 year high levels. The index has returned over 5% for the quarter, with a 1 year return to 31 August of 24.27%. Markets were buoyed by a number of factors including multi-year highs in Chinese manufacturing data; a change in Government and more recently ‘no taper’ to the US stimulus program (commented on above). The consumer discretionary sector has continued its turnaround, among the best performing. We are in an environment of improving consumer confidence and low interest rates which in turn reduces the financial burden on households; allowing consumers to spend on discretionary or luxury goods.

Despite negative returns early this calendar year, the Australian small cap index returned 4.90% for the quarter. Again, good quality fund managers have posted 1 year returns well above the index.

International Equities

Despite a negative return in August, the international equities sector again provided the highest return for the quarter, returning 8.28% (for Australian investors). The depreciation of the Australian dollar (although appreciating more recently) has boosted returns for Australian investors who have enjoyed a significant 1 year return with the index returning almost 37% to the end of August.

The expectation that the Fed would taper monetary stimulus hit US markets in August, with the S&P 500 index falling more than 3%. However, with the index up over 14% year to date and the ‘shot in the arm’ so to speak from the Fed’s surprise decision not to begin tapering its stimulus program, the US market looks set to deliver a strong calendar year return.

Property

The Australian Real Estate Investment Trusts (AREIT) sector continues to underperform the equity market, with the index falling 1.78% for the 3 months ending August. However, in the context of the longer term, the sector maintains solid 1 and 3 year returns of 16.58% and 11.33% per annum respectively.

Fixed Interest & Cash

The Australian bond index (UBS Composite Bond) and global bond index (Barclays Global Aggregate) returned -0.52% and -0.78% respectively for the quarter. This is perhaps a slight anomaly, the fact that an investors’ so called ‘defensive allocation’ can provide a negative return. We currently find ourselves in a historically low interest rate environment. As the bond market turns due to an eventual rise in interest rates, long dated bond investments can incur a capital loss.

Cash rates continue to fall, with the Reserve Bank of Australia reducing the official interest rate by a further 0.25% in August.

 

1 Oliver’s Insights, 8 August 2013
2, 3 McMahon, Stephen, “Stockmarket jumps on US reverse”, www.news.com.au
4, 6 Van Eyk – Investment Outlook Report, August 2013
5 Santa, Martin, “Germany, France haul euro zone out of recession”, www.reuters.com

 

 

September 30, 2013
 
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