The final quarter of the 2012/13 financial year was full of volatility. May saw our market hit highs not seen since the GFC but the market began to pull back in the middle of May and this pull back continued into June. The final result was the market dropped 163.9 points or -3.3% for the quarter.
The final result for the 2012/13 financial year has still been very positive. The ASX/200 rose 708 points to record a 12 month return of 17.29%.
The market pull back has provided good buying opportunities especially within the banking sector where prior to the pull back valuations were looking stretched. Dividend income is still particularly strong as demonstrated below:
|Grossed Up Dividend Yield at 30/06/2013
This quarter the RBA provided us with a 0.25% interest rate cut with the official cash rate now sitting at 2.75%. We are expecting another interest rate cut over the coming months however the falling Australian dollar may delay this cut. It should be noted that interest rates are at 40 year lows and mortgage holders need to consider if it time to fix rates over the coming months.
Our outlook for the Australian Share market is still positive and while we expect volatility to continue these negative periods provide the perfect time to enter the market.
Coming out of the first quarter of 2013 the data shows our economy is slowing down. The first quarter GDP statistics were weaker than expected with the economy growing around 2.5%, which is below the 3% trend rate of growth.
Consumer confidence fell 7% in May, which was the biggest monthly decline since December 2011. This can probably largely be attributed to the Federal budget.
Job vacancies fell 2.4% in May after falling 1.7% in April to what the ANZ described as “the lowest level so far in this cycle”. Household surveys also showed more people are concerned about losing their jobs. This will also put pressure on GDP as higher unemployment, low consumer confidence and tighter household expenditure will likely further restrict growth.
The future of Australia’s interest rates and also the sharemarket will be highly dependent upon our unemployment rate. The unemployment rate was 5.50% in May and has increased by 0.20% over the last 6 months. The future unemployment rate will reflect the level of economic strength or recovery in the months to come.
Notwithstanding the softer data, the Reserve Bank of Australia (RBA) decided to leave interest rates alone (currently 2.75%) at its meetings in early June and July. In a statement released after the meeting, the RBA noted the slower pace of growth and that inflation remains under control, while the effects of past interest rate cuts are showing up in household behaviour. The lower Australian dollar was mentioned as a factor contributing to easier financial conditions which did not justify an immediate rate cut. However, the Bank noted scope for further rate cuts in future if necessary to which we expect another before December 2013.
What’s Causing the Current Market Volatility?
Amongst the many factors that are driving the volatility in the Australian market at present, four big ones spring to mind.
First, there are global forces which are driven by nervousness surrounding the “tapering” of quantitative easing in the US.
On the 19th June, US Federal Reserve chairman Ben Bernanke indicated that “tapering” – slowing the pace of the Fed’s asset purchases – could begin later in the year if growth, inflation and the labour market meet expectations. Markets reacted negatively to this statement.
Second, there are concerns around Chinese growth being disappointingly slow and unease around a credit squeeze.
Mid June saw the unofficial manufacturing PMI for June fall to a worse than expected 48.3 which represented a 9 month low and signalled contraction within China’s economy.
A sharp spike in interbank rates in China raised concerns over the stability of China’s banking system, culminating in a near-panic on the 25th June when the Shanghai Composite index fell 6% intraday before rallying 6% later in the day after the People’s Bank of China said it had injected funds into some financial institutions to bolster their liquidity.
Third, there are domestic factors at play, with the resource sector outlook under threat following commodity price falls and profit downgrades.
Commodity prices have been generally lower dragged down by both the “QE Tapering” & “China” fears. Gold has been the biggest casualty falling 13% over the month of June.
Most companies within this sector are delaying or cancelling projects and undertaking cost cutting measures.
And fourth, the sharp fall of the Australian dollar is prompting overseas investors to repatriate their funds, and in order to do so, they are rushing to sell Australian assets.
While this is a negative for anyone planning an overseas holiday there is a general belief that a lower currency is not only good for an economy’s competitiveness but also its stock market. This has been demonstrated in Japan with the Nikkei booming since its currency headed South.
A lower Australian dollar will make Rio & BHP Billiton more profitable companies, as their exports, albeit with lower commodity prices get converted to Australian Dollars.