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Market Commentary - November 2012

by Matthew Congiusta

The current global economic environment is showing signs of stabilisation, however there are inherent risks and issues to be contended with to achieve future growth.

Economic indicators released in the US in October were mostly positive. It appears the US may be moving to a slightly firmer period of growth, according to estimates which show the US economy grew in the September 2012 quarter with an annualised rate of 2% (Bureau of Economic Analysis). This follows on from a 1.3% rise (annualised) in the June 2012 quarter.

The Chinese economy has also shown its resilience with the September quarter Gross Domestic Product (GDP) figure showing the economy growing at an annualised rate of 7.4%, although down from 7.6% in the previous quarter, still a robust number. However, Europe and Japan continue to struggle. Europe remains in mild recession and Japan’s growth remains weak, with a recent fall in exports.

The Federal Reserve’s third round of Quantitative Easing (QE3) announcement was positive for liquidity and short term market sentiment, but many would question whether it has achieved the expected response. The European Central Bank’s (ECB) Outright Monetary Policy (OMT) has not been put into action as not all member nations have signed up to its conditions. In short, the OMT refers to the ECB’s purchases in sovereign bond markets, of bonds issued by Eurozone member states. The aim is to lower bond yields and hence borrowing costs for countries that require assistance; in turn increasing investor confidence in the Euro.

At the moment, Europe as a whole is officially in recession. European GDP shrank by 0.1% in the third quarter after a drop of 0.2% in the second quarter1. Country specific data also suggests that German growth is slowing. The European Central Bank (ECB) halved its 2013 growth forecast for Germany and now expects GDP to grow 0.8% next year, down from the previous forecast of 1.7%. This is somewhat in line with the German government’s own forecast for 2013 of around 1%. To date, Germany has been somewhat shielded from the difficulties in the Eurozone, due to its strong trading ties with non-Eurozone countries and the low Euro. However, with the global economy slowing, German exports are affected.

In the US, the victory by President Obama did little to change the underlying dynamic in US politics. With the Republicans retaining a majority in the House of Representatives and the Democrats increasing theirs in the Senate, the risk of political gridlock looms. Eyes have turned to President Obama and the hope of decisive action in the face of the pending ‘fiscal cliff’. It seems the US economy cannot afford an aggressive tightening in fiscal policy, that is, “going over the cliff”. The situation in the US is elaborated on in our other article “The US Fiscal Cliff – Fact or Fantasy”.

After months of speculation, China’s Communist Party leaders have selected a new group of seven men to be the country’s core leaders and set its agenda for the coming decade. The outgoing head of the Chinese Communist Party has insisted on the need to produce more sustainable growth. China’s Xi Jinping has succeeded Hu Jintao, taking over his top positions as head of the Communist Party and the country’s powerful military.

The latest round of data appeared to show that industrial production expanded by 9.6% over the year to October from 9.2%, while retail sales and fixed investments also improved. Retail sales are now 14.5% above levels of a year ago1.

The Chinese Central Bank has also recently injected a record US$60 billion into the money market, possibly supporting the funding requirements of infrastructure projects announced earlier in the year. The October export data showed an improvement. Chinese exports grew by 11.6% over the year while imports rose 2.4%1. While growth remains relatively strong, keeping inflation under control is a key objective of the Chinese government. This data was also positive, with the October Consumer Price Index (CPI) declining to 1.7% from 1.9%1.

With signs of stabilisation in China, it is expected that the Peoples Bank of China will hold lending rates as they are for now, after cutting rates in July. The IMF is forecasting 8.2% economic growth in 2013. That would be a very positive outcome for the global economy and Australia in particular.

Back home, Australia’s economic indicators released in October were mixed. Unemployment rose to a 29 month high in September, increasing to 5.4%, from 5.1% in August2. However, analysts consider the increase may be due to a higher participation rate (a measure of people aged over 15 years who are in work or looking for work), which also rose. Inflation rose 2% in the year to September, which was higher than expected but remains within Reserve Bank of Australia’s (RBA) target band of 2% - 3% per annum.

Retail sales continued their positive trend, rising 0.5% in September2. The strongest sectors were food retailing and household goods, whilst the weakest sectors included clothing and department stores. Consumer and business confidence also rose in October and September respectively.

On 6 November, the RBA announced that it would maintain the cash rate at 3.25%. The RBA noted that the full effect of previous cuts (including the 0.25% cut in October) hasn’t been felt by the wider economy.

The Australian share market extended its positive run for a fifth consecutive month into October. The S&P/ASX 200 Accumulation Index returned 7.5% for the quarter, with a return of 10.27% for the year to October. The listed property index returned 6.59% for the quarter, bringing the annual return to 30.94% for the year to October.

 International equities also had a strong quarter, with the index returning 6.16%, bringing the annual return to 12.06% for the year to October. Cash rates are on the decline and there is an expectation of further cuts. Australian and global fixed interest has continued to perform well, providing returns of 10.22% and 10.32% respectively, for the year to October.

As we move toward Christmas and into 2013, the issues discussed above will continue to dominate headlines with the outcomes impacting global markets. At the forefront of global market sentiment will be the ability of the US Government to address the many issues they face in a swift, but workmanlike fashion.

Financial Keys would also like to take this opportunity to wish you all a very Merry Christmas and a safe and prosperous 2013. The Financial Keys office will remain open over the Christmas period.

1 Van Eyk Research – Investment Outlook Report Australia November 2012
2 Lonsec Month in Review October 2012


December 3, 2012
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