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Market Commentary - March 2013

by Brendan Gallagher

Economic Update

Australian economic growth continues to power along, with the latest figures showing 0.6% growth for the December quarter, delivering Gross Domestic Product growth for 2012 of 3.1%. The biggest contributors to this were mining (+0.9%), financial and insurance services (+0.4%) and social assistance (+0.4%).1

The interest rate cuts by the Reserve Bank of Australia (RBA) last year appear to be impacting consumer sentiment, which has recently shown signs of improvement.2 Since May 2012, the RBA has reduced the cash rate from 4.25% to the current level of 3.00%.3 Consumer confidence is at the highest level since December 2010. Business confidence, as measured by the monthly NAB Business Survey, also shows signs of recovery. NAB indicated that this was attributable to a number of factors including: improved financial markets; avoidance of the fiscal cliff; recent rate cuts and strengthening Chinese economy.4

The RBA left rates on hold in February and March, citing the need to wait until rate cuts had made their full effect on the Australian economy. The RBA also noted that the Australian dollar remained higher than they expected, and credit demand remained subdued. Inflation remains within the targeted band and so there was insufficient reason to change the official cash rate.

On the upside, retail sales (seasonally adjusted) surprised in January where it was up 0.9% for the month, bouncing back from a disappointing December. Another unexpected surprise was unemployment staying steady at 5.4%.

In the US, the news was mainly positive, with unemployment figures falling to 7.7% in February, from 7.9% in January. Retail sales continued to slowly improve with January’s 0.1% growth being the third consecutive month of growth.

The minutes from the US Federal Reserve’s January meeting indicated a number of officials were nervous about continued quantitative easing and its ultimate impact on inflation. The Fed also indicated in their December meeting that they would keep interest rates near zero until unemployment fell to 6.5% provided inflation remained below 2.5%.

In Europe the news wasn’t as good, with the German economy, Europe’s engine room, contracting in the December quarter. Southern Europe continues to struggle with very high unemployment rates and may continue to have few positives on the horizon. The Italian elections provided little solace, the centre left winning the lower house but not the Senate, providing little investor confidence.

In Japan, the Prime Minister Mr Shinzo Abe announced a fiscal stimulus package of 10 trillion yen (AUD109billion), in an effort to inflate the economy out of the doldrums that it has been in for much of the past two decades. Much of the package will be directed towards job growth, upgrading ageing infrastructure and continued rebuilding of areas affected by 2011 Earthquake - Tsunami.

Australian Equities

The Australian share market has risen strongly since June, with the past quarter being particularly strong. The ASX 200 Accumulation index is up 24.19% for the year to 28 February 2013. The Australian market is now at its highest level since 2008, more importantly, breaking through the 5,000 (and staying there), which has been a psychological barrier over the past few years. The biggest contributors to the recent increase were NAB, ANZ, Wesfarmers, and Woolworths.5

The Australian Small Companies index continues to lag the larger end of the market, delivering an impressive 8.5% for the three months to 28 February but a disappointing -2.4% past 12 months.

The recent reporting season saw companies report higher profits than expected (in the main), with banks and industrial doing most of the heaving lifting, with resources underperforming.

Source: Yahoo Finance

International Equities

In the US, the Dow Jones marches along, delivering strong returns for investors over the past few months to a record high of 14,447 on 11 March 2013. The fears of a fiscal cliff which saw markets pause in November and December have long been cast aside with regular economic data boosting confidence in the world’s largest economy and investment market.

Looking at the graph below, you can see that the markets rise has been quite strong since the lows of early 2009. For Australian investors, the initial recover in overseas share markets was hampered by fall of the US dollar during the period from early 2009 until early 2011. Since then the Aussie dollar has remained in a steady band and investors have been able to reap the rewards of investing in the US market. Should the US dollar depreciate against the Australian dollar, Australian investors will receive an additional boost in their investment return, providing an additional attraction to investing in US stocks.

Elsewhere, Europe has broadly followed most western markets, with the FTSE, DAX and CAC all reporting strong increases over the past quarter.

Japan has been the biggest winner in global equities over the past quarter, with the NIKKEI 225 picking up close to 22.37% for the three months to 28 February and 30.76% for the past six months.

Source: Yahoo Finance


The Australian Real Estate Investment Trust (AREIT) market continues its rapid recovery from the lows of 2009. ASX 200 A-REIT delivered 11.19% for the three months to 28 February 2013 and outperformed the broader equity market, returning 33.41% for the past 12 months, certainly rewarding those investors who have been patiently awaiting this strong recovery. REIT’s attractive yield compared to bonds has seen strong flows into this asset class.

Data provided by RBA, RP Data-Rismark, indicates housing prices picking up in Sydney, Perth, Brisbane and Melbourne following falls during the past two years. Auction clearance rates in capital cities appear to be on the rise, with lower interest rates, stable employment boosting buyers’ confidence.

*Excluding apartments; measured as areas outside of capital cities in mainland states
Sources: RBA; RP Data-Riskmark

Fixed Interest and Cash

The UBS Composite Bond Index returned 0.55% for the three months to 28 February and 8.18% for the past year. Cash rates remained steady at 3.00% during January – March period. 

1 Lonsec – Month in Review, February 2013
2 Melbourne Institute and Westpac
3 – Cash Rate Target – Interest Rate Changes (0.5% in May 2012, 0.25% in Jun, Oct, Dec 2012)
4 NAB Monthly Business Survey, December 2012, January 2013
5 Van Eyk – Investment Market Report = March 2013



March 28, 2013
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