The final quarter for the 2014 calendar year was volatile but positive with the ASX/200 closing at 5,411 on 31 December 2014. The ASX/200 finished the previous quarter (30/09/2014) at 5,292.80 which is a gain of 118.20 points or 2.23%.
The quarter kicked off strongly with October up 233.80 points or 4.42%, November wiped October’s gains off losing 213.60 points or 4.02% and then December finished the quarter up 98 points or 1.84%.
For the calendar year of 2014 the ASX/200 increased from 5,352.20 to 5,411 an increase of 58.80 points or 1.10%. We point out that the market is still trading 21% lower than the high from 1st November 2007 of 6,873.20.
High yielding sectors were the best performers of 2014 with A-REITs (listed property trusts) up 27%, telecommunications 21% and healthcare 24%. The banking sector still provided a strong yield however share price growth was impacted by regulatory concerns around the recommendations of the Financial Services Inquiry.
Energy and material sectors were the worst performers due to falling commodity prices.
Between July 2014 and January 2015 the price of oil plunged over 55%. One of the steepest legs of this decline was a 10% drop that occurred on Black Friday November the 28th following a meeting of OPEC. The reason for this fall was that the Saudis had refused to agree to production decreases being pushed by some OPEC members, instead choosing to let the market play out for the time being.
Over the 2014 calendar year the Australian dollar also dropped losing 8.2% and falling from US$89.15 on 1stJanuary 2014 to close the year at US$81.84 on 31st December 2014. December saw our dollar reach a 4 year low against the US Dollar. While the drop in our dollar isn’t good for people travelling overseas it is good for some Australian companies and the Reserve Bank of Australia has publically stated that it would like to see the Australian dollar weaker still. A lower Australian dollar would improve the competitiveness of Australian manufacturers and should provide a boost to the tourism market from international travellers.
Australian company balance sheets are generally in a good position. Most companies are able to comfortably service debt obligations and for some borrowing costs are falling as debt facilities are renewed. Several companies have also indicated they intend to increase their dividend payments (Telstra) and some (such as Wesfarmers) are returning capital to investors. We expect that the market will continue to generate a dividend yield above 4% for investors. This return is appealing compared to the dividend yield of other major international equity markets and could see Australian shares continue to be supported by offshore investors. It’s also attractive when compared to our term deposit and cash rates.
Over the last quarter of 2014 the cash rate remained steady at 2.5%. The Reserve Bank of Australia reported that growth in our economy was growing at a moderate pace and inflation was, as expected, stable at around 2% to 3%.
Economists expect that interest rates may well decline further in 2015 or at the very least remain where they are for an extended period.
Australia’s GDP rose only 0.3% which is consistent with expectations, albeit not exciting. GDP growth for 2015 is forecast to be in the region of 2.7% to 3.5%. Higher than usual levels of uncertainty in economic outlook, as well as the need for a significant lift in the non-mining segment of the economy, are the driving factors of such a broad range.
Unemployment was one of the only things that was up in 2014. The unemployment rate is forecast to hover around 6.1 – 6.2% over the coming 12 months.
Housing investment was also up right throughout 2014. Further growth in this area is expected going into 2015 with economists predicting an increase of around 7.5% for the year. Low interest rates, robust population growth and underlying pent-up demand as well as a shortage of supply are all drivers here.
Oil and commodity prices took a beating over the last quarter of 2014 with oil declining around 55% over the last 18 months. The US dollar strengthened over the quarter and our dollar fell to US$0.82 by the end of December. The RBA reported that our dollar “remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices in recent months. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.”
A slump in the oil price is not all bad news for the average Aussie however, if you drive a vehicle you will have noticed it costs a lot less to get around at present.
We are still very much in an era of change (post-GFC and the mining boom) and we anticipate that we will need to continue to ride the volatility wave across all sectors of economy for some time yet.
On the upside, the Australian share market is forecast to rally to around 6,000 points by 2015 year-end.
The below chart illustrates the quick decline of our major exports in the last quarter of 2014:
Property Market Update
The December 2014 results of the CoreLogic RP Data Home Value Index saw combined capital city home values rise by 0.9% over the month to take the annual increase to 7.9%.
The CoreLogic RP Data Home Value Index showed that dwelling values across the combined capital cities increased by 0.9% in December 2014. Throughout the month home values rose in all cities except for Darwin (-0.6%) and Canberra (-0.6%) while values were unchanged in Sydney.
Over the final quarter of 2014, capital city home values increased by 1.6%, with Perth (+2.8%), Sydney (+2.3%) and Brisbane (+1.8%) recording the greatest quarterly gains, while values fell in Darwin (-1.7%) and Canberra (-3.4%). Despite the positive result across most cities, the annual rate of capital gain across Australia’s capital city housing market has continued to slow.
The capital gain on houses compared to units was higher, with house values gaining 8.4% over the calendar year compared with a 5.1% increase in unit values. According to CoreLogic RP Data research analyst Cameron Kusher, detached housing remains in high demand despite the higher price point. He said we haven’t seen the same ramp up in building approvals for detached housing compared with multi unit dwelling approvals.
“Based on the median price across the combined capital cities, houses are attracting a $100,000 premium over apartments.”
“The slowing annual growth rate is further evidence that the housing market is losing some steam with combined capital city home values increasing by 9.8% over the 2013 calendar year compared to a more moderate 7.9% increase in 2014.”
Based on the December results, the annual rate of capital growth has continued its moderation which has been ongoing since April 2014.
After the annual rate of combined capital city home value growth peaked at 11.5% over the 12 months to April 2014, the rate has now slowed to 7.9% in December 2014. Combined capital city home values have increased at their slowest annual pace since October 2013.
Although home value growth has been recorded at 7.9% throughout the 2014 calendar year, the rate of growth has varied between a fall of -0.6% in Canberra to an increase of 12.4% in Sydney. While Canberra was the only city to record an annual fall in home values, Melbourne was the only city other than Sydney to have recorded annual value growth of more than 5.0% (7.6%).
Auction clearance rates reduced noticeably across the two largest auction markets, Sydney and Melbourne, over the final two months of the year. While clearance rates were typically recorded at around the high 70% and mid 70% mark respectively, at the start of Spring, clearance rates in December were around the mid to high 60% mark in both Sydney and Melbourne.
While dwelling values are generally still rising, rental growth is sitting at its lowest annual rate in more than a decade, with combined capital city rents increasing by just 1.8% over the past 12 months. House rents have increased by 1.7% over the past year compared with a 2.4% for units. With value growth outpacing rental growth, yields continue to shift lower. Twelve months ago gross rental yields across the combined capitals were recorded at 3.9% for houses and 4.6% for units. As at December 2014, gross rental yields were recorded at 3.7% for houses and 4.5% for units.
According to Mr Kusher, CoreLogic RP Data expects dwelling values will continue to appreciate in 2015, at least across the combined capital cities. However, the rate of capital gain is likely to continue to slow over the coming months.
“Affordability hurdles in Sydney, and to a lesser extent in Melbourne, are making it increasingly difficult for some buyers to enter the market. Additionally, low rental yields and the likelihood of tougher lending criteria to investment buyers will likely dampen the very active investor segment of the market which may in turn reduce housing demand in 2015.”
“Furthermore, with so much investment activity increasing the stock of rental housing as well as the surge in dwelling approvals, we would expect that rental growth will remain sluggish across the capital cities. As a result we anticipate a further compression of gross rental yields in 2015,” Mr Kusher said.
Source RP Data