Market News
The Australian Share Market tracked back slightly over November following a very healthy run since the start of the financial year. The S&P/ASX200 benchmark index lost 105.4 points to close at 5,320.1, which is down 1.94% for the month of November.
The result so far for the 2013/14 financial year is still positive with the market up 517.51 points or 10.77%. This is a great result over a five month period.
Most sectors posted small negative returns for the month of November, the exception being the Financials (ex REIT’s) sector which posted gains of 0.2%. Macquarie Group was again a standout performer within this sector increasing 8.3% for the month.
The energy sector was the worst performing sector again this month dropping -6.3% for November. The biggest detractor here was Worley Parsons who wiped 25.9% off their share price following a profit guidance downgrade.
Globally equity markets generally rose during November. The Japanese market was the best performing major equity market and the US repeatedly made new record highs during the month.
Back in 2007 the US Dow Jones index reached a high of 14,164.53 (on 9th October 2007). The Dow only returned to this point in March 2013 and has been gradually reaching higher to finally break through the 16,000 point level and reach 16,097.33 on 27th November 2013.
So while the US Dow has now clawed back all losses from the GFC and is now in positive territory once more, it’s interesting to note that the Australian share market is still down 22.6% from the market high from 1st November 2007 (6,873.20).
2014 Outlook
- UBS has released their 2014 outlook for 2014 please find below a summary of their report.
- UBS target an ASX200 level of 5,700 by year end 2014. This represents a potential return of 11.5%.
- UBS have forecast the Australian dollar to trade around $0.85 by year end 2014.
Key Themes
- Housing related stocks look attractive as the cycle continues to strengthen.
- US dollar exposed stocks still appear attractive given expectation for the Australian dollar to depreciate further.
- Retain a cautious outlook on the mining services sector, we note that value can still be found here but not for the faint hearted.
- Banks look somewhat expensive based on conventional valuations however we are still attracted to this sector given the high dividend yields.
- Overweight in resources and energy following improving conditions.
Downside Risks for 2014
- The Fed.
- The Yield Trade.
- The Australian Dollar.
Australian equities are relatively interest rate sensitive given both the domination of the financial sector and the generally high dividend payout ratio. If the US decides to withdraw QE stimulus faster than expected this will flow through to domestic bond yields and likely pressure the valuations of high yielding stocks, particularly the banks.
The Australian dollar may also come under pressure in this scenario, hurting international investors, though this should be argued to be a medium-term positive for the economy and earnings cycle.
Upside Risks for 2014
- Further P/E Expansion.
- Australian dollar earnings kick.
- Domestic revival.
Upside risks for Australia may come from on-going P/E rerating presumably on the back of global interest rate backdrop, combined with subdued but acceptable economic growth. P/E’s in the range of 15 – 16x is not implausible.
Another positive driver could be the lower Australian dollar (in the $0.80 – $0.85 area), producing positive earnings surprise and improving business spending. This would prove a negative for overseas investors.
Finally positive domestic economic surprise driven by the housing sector could spur a drawdown in our high savings rate and drive a domestic earnings surprise in banks and domestic revival. However this may bring the RBA into play and also limit the Australian dollar downside.