Market Commentary - June 2013
by Brendan Gallagher
The June quarter provided a reminder of the danger of extrapolating long term trends from short term market movements. The Australian share market surged to a high of 5,220 in May following several months of confidence in improved global conditions. From late May this confidence dissipated and investors saw the Australian share market fall 10% before a modest recovery at the end of June.
The potential for the US Federal Reserve to reduce the stimulus to the economy via its quantitative easing program caused concern for sharemarkets around the world who feared that the stimulus taps would be turned off. Ben Bernanke provided some reassurance by explaining that the Fed was well aware that a premature tightening of monetary policy could undo much of the work done to date to stimulate the economy and as such they would wait until they were confident that the US economy would be able to stand on its own two feet before reducing their support.
Gross Domestic Product Growth (GDP) in the US continues to grow, with 2.4% annualised growth1 for the March Quarter delivered primarily by the private sector, as the government rapidly reduces its spending. The housing sector has been a large contributor to this improvement, together with increased consumer confidence providing a pick- up in spending.
The stagnation of European economies shows little sign of changing in the short term. While the German economy delivered a modest 0.1% growth for the March quarter, countries such as Italy, France and Spain contracted. To assist these counties, the ECB has loosened its Austerity measures in an effort to help stimulate their economies. There was some good news however with Spanish exports increasing, and domestic demand for imports reducing to such an extent that Spain reported its first monthly trade surplus since the 1970’s.
The weaker Japanese Yen appears to be having the desired affect, with GDP growth of 3.5% in annualised terms for the March quarter, beating market expectations. Improved conditions for exporters saw their numbers improve markedly, while increased domestic confidence helped the Japanese consumer increase their spending. It is yet to be seen whether the new stimulatory approach taken by Mr Abe provides sustainable benefits to the Japanese economy which has spent much of the past two decades stuck in neutral.
China has recognised that its economy needs to move from investment led growth to a more sustainable growth model. GDP growth has slowed, impacting commodity based countries such as Australia.
Official interest rates fell 0.25% in May, with the Reserve Bank of Australia comfortable with the inflation rate and concerned with the impact of the slowdown in the resources sector on the broader economy. Reduced interest rates, reduced demand for our commodities and the improvement in US economic conditions has seen the Australian dollar depreciate sharply against the US dollar and other major international currencies. This will no doubt please exporters of goods and services however the benefits will likely take some time to take effect.
Reduced interest rates have been welcomed by the retail industry and the housing sector. Retail sales for the past year have grown 3.2%.
With commodity prices reducing significantly, there is a major shift occurring in the Australian resources sector. Miners are reducing capital investment, and cutting costs in an effort to drive profit margin. This is having profound effects on this sector, particularly mining services and communities that have grown reliant upon the enormous resources sector growth of the past decade.
|Retail Sales Growth (annual growth%)||3.2||4.3||-1.1||-0.1||12.9|
Source: Bloomberg, central banks and national statistics agencies, van Eyk Research.
Reduced confidence appears to be creeping into the Australian economy off the back of mixed news from overseas, lack of long term direction from the Australian government (and change of Prime Minister in June), elections expected in September 2013, and the transition from the resources sector for many Australian workers and businesses.
The past quarter saw the Australian share market rise to 5 year high levels with the ASX 200 Accumulation Index touching above 5,200. More recently we have seen a correction with the market down in May which has proven to be a tough month for share markets historically. This was bound to happen as the ‘in favour’ high yield stocks had appreciated to expensive levels and this recent sell-off has brought them closer to fair value. In line with this, we saw banks and consumer staples giving up some recent gains. Despite the recent volatility, the ASX 200 index is still up 26.50% for the year ending 31 May, as investors try to take advantage of stocks offering solid dividend yields and franking credits, in this period of low interest rates.
The small cap sector continues to underperform the more developed companies with the Small Ordinaries index down 11.3% for the quarter. The recent sell-off in the small resources space has been a large contributor to this negative performance. However, with volatility, opportunity can present for the forward thinking investor and the better quality fund managers have been able to steer their portfolios to achieve outperformance.
The international equities sector as a whole provided the highest return for the quarter returning 13.38%, bringing the annual return to 29.30%.
In the US, the S&P 500 index recorded positive performance for the quarter. Despite easing off record highs during May as investors began to factor in the potential tapering of the Fed’s QE program, the index returned 2.1% for the month and is up 14.3% year to date2. With the depreciation of the Australian dollar, Australian investors have seen significant gains in the value of their international investments (including through managed funds) through currency fluctuation alone.
Europe ended the quarter on a positive note after posting mixed results throughout. The German DAX continues to appreciate while posting the best performance in May, up 5.5%2. The beginning of the quarter saw uncertainty stemming from Cyprus and political issues in Italy. However the UK, France and Italy saw their indexes increase in excess of 2.4% for the month of May2.
The Japanese Nikkei 225 continued its hot streak leading into the quarter posting gains of 7.25% and 11.8% for the months of March and April respectively. After recording nine consecutive months of positive gains, the index made new post-GFC highs2. The sharp appreciation of the stock market, together with a near doubling of Japanese bond yields led to profit taking which saw the index slightly down for May.
The Australian Real Estate Investment Trusts (AREIT) sector provided a more subdued return of 1.43% for the quarter, but still maintains its healthy one year return of 30.80%. Similar to the high yielding stocks in the Australian Equities sector, the AREIT’s sector has been a major beneficiary of the search for yield theme.
Fixed Interest and Cash
The Australian bond index (UBS Composite Bond) and global bond index (Barclays Global Aggregate) returned 1.26% and 0.75% respectively for the quarter. Our recommended investments in this space have returned around 5%-6% for the year to 31 May. Australian cash and term deposit yields remain historically low with the RBA cutting the cash rate to 2.75% during the quarter.
1 Van Eyk Investor Outlook Report (Australia) June 2013, p.10.
2 Van Eyk Market Update (Australia) June 2013, p.2.
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