Market Commentary - February 2012
by Brendan Gallagher
European sovereign debt issues continued to influence local and international markets over the past quarter. While Australian shares and bonds continue to produce strong income, the volatility of share prices continues.
Europe remains the drag on global markets. The debt crisis lingers and has seen several countries have their credit rating downgraded, including France. Germany remains the only major European economy with a triple-A rating. The Greek debt crisis provides ongoing news headlines out of Europe. European leaders are offering additional funds to prop up the Greek economy provided strict austerity policies are introduced, designed to cut costs, boost the governments ailing revenues and cut debt levels. With so many European countries and institutions involved, it is a slow and complicated process.
The austerity measures already introduced in many European countries are showing signs of biting into economic growth. Europe is expected to slip into a shallow recession in 2012 before emerging in 2013 with slow growth. On a positive note is the improvement shown by Germany. Industrial production and job growth has surprised on the upside. German unemployment is now at 5.5%1, the lowest level since reunification more than two decades ago. The challenge that European leaders face, is to carefully balance their fiscal and monetary policies in such a way that costs are reduced (to help reduce debt levels) but not to an extent that will completely put the brakes on economic growth. The difficult but necessary structural changes that many European countries have to make are difficult and will take some time to not only implement, but also realise the full benefits of these changes.
In China, the strategies that the Chinese authorities have employed to slow their economy and tame inflation appears to have worked. With inflation in China easing to an acceptable level and the property sector cooling, Chinese authorities have started to loosen their monetary policy by reducing the Banks’ reserve requirements by 0.50% in December. The Chinese economy is demonstrating that it is being well managed given uneven global conditions. Corporate profitability is strong. Manufacturing levels have increased and GDP growth, although slower than 12 months ago, is powering along at an expected 8.25% for 2012, increasing to 8.75% in 2013.2
In Japan, growth continues to show signs of improvement after a testing 2011. Industrial production and consumer sentiment are increasing. The government continues to spend large sums to help boost the northeast areas of Japan from last year’s disaster. Japan is expected to grow by 1.0-1.5% in 2012.3
Over the past quarter, the US economy showed further improvement. Unemployment, for so long stuck above 9%, has fallen further, to 8.3% in January. Business confidence is growing, resulting in more jobs being created. Manufacturing output in the US increased, as did exports. One interesting sign is the improvement in motor vehicles sales, with cars rolling out of the showroom at an annualised rate of 14.1 million in January.4
The Australian economy had a strong ending to 2011 thanks to strong commodity prices and recovery from flooding earlier in the year. Consumer spending has been patchy, with confidence being hit by the seemingly endless media reporting of doom and gloom in Europe. Other Australian economic data is encouraging, inflation remains within the RBA’s target range, unemployment is at a consistent level, and growth remains strong. Following rate cuts in November and December, the RBA decided to leave rates on hold in February. Further rate cuts are expected in 2012, due to soft market conditions outside of the resources sector.
Following poor share market performance in the latter half of 2011, January saw a strong bounce in global share markets. The US equity market for example, provided the best returns in 15 years off the back of improved market conditions and strong corporate earnings. The S&P 500 gained 4.4% in January. The majority of US companies reported earnings that beat earlier estimates. Australian equities also performed well in January, with the ASX 300 Accumulation Index providing investors with a 5.1% return for the month.
The year ahead looks to be dominated by the changing global landscape. Emerging economies continuing to grow and prosper at a healthy rate and most developed economies dealing with large amounts of debt which need to be brought under control. The positive signs that we’ve seen recently from some of the larger economies is encouraging and also from corporate earnings in recent times. Whilst corporate earnings remain strong, investors will benefit from good dividend yields, franking credits, together with income received from bonds.
1 and 2 IMF – World Economic Outlook Update, 24 January 2012
3 and 4 Van Eyk – Investment Outlook Report February 2012
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