The first quarter of the 2013/14 financial year was very strong. Early September saw the ASX/200 reach its highest level in over 5 years. The market kept pushing and eventually reached a high of 5,307.10 on 27th September before dropping slightly and closing the quarter at 5,218.90. The final result being that the market jumped 416.3 points or 8.67% for the quarter.
Calender year to date the ASX/200 has risen 569.9 points from 4,649 points on 31st December 2012 to 5,218.90. This represents a gain of 12.26% over the nine month period and we are well on the way to posting a great return for 2013!
The key issues affecting markets over the quarter were:
- Reporting Season; this proved relatively uneventful with companies continuing to be cautious in their forecasts with a key focus on costs and efficiency.
- Syria; The USA’s threat of a strike on Syria is now on hold
- The US Fed Tapering; the Fed surprised markets by maintaining its $85 billion per month rate of purchases. Equity markets immediately rallied on the news.
- The Election; the change in Government has so far been positive for the ASX and business confidence is also improving.
This quarter the RBA provided us with another 0.25% interest rate cut with the official cash rate now sitting at 2.50%. We are expecting another interest rate cut over the coming months however a 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 is time to fix rates over the coming months.
Our outlook for the Australian Share market is still positive however we expect volatility to continue. Short term these negative periods provide the perfect time to enter the market for the long term investor.
Our economy continues to grow below trend pace. GDP for the first quarter of 2013/2014 was 2.6%; still 0.4% below the 3.0% expected growth rate. Reserve Bank Governor Glenn Stevens says that this lag in growth is “…expected to continue in the near term as the economy adjusts to lower levels of mining investment.”
The RBA cut rates in August by 0.25, which sees the cash rate at 2.50 currently. The September and October meetings saw rates kept on hold, however they have left room for more rate cuts. Governor Stevens stated “The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target.” It was noted that inflation remains stable at this time.
Unemployment has climbed to its highest level in four years to 5.8%. Full-time jobs declined by 2,600 in August and 8,200 part-time jobs were lost. Conversely the number of hours worked increased by 1.1 million hours to 1.65 billion hours. This increase can largely be attributed to the poor labour force sentiment and growing fear of further job losses across the retail, mining and resources sectors.
The Australian dollar rose from US$0.92 on 1 July to US$0.95 at 20 September but has since again declined to US$0.94. This is around 10% below its level in April 2013 however. To stimulate economic growth the Aussie dollar needs to fall further. With the unrest occurring in the US government currently, the US dollar has not experienced much volatility at all. This is largely due to the sentiment that the shutdown will be short-lived.
On a positive note, consumer confidence rose 4.95% in September. Consumer confidence has risen each month over the quarter and is 12.7% higher than this time twelve months ago.
Property Market News
Property prices and the risk of a property bubble seem to be dominating the press headlines at present so we thought we’d take this opportunity to give you the facts.
Australian capital city home values have hit a record high, driven by accelerating prices in Sydney and Melbourne. Sydney’s median house values rose by 2.5% in September, and Melbourne gained 2.4%. Still, house values fell in every other major city except Adelaide during September, meaning aggregate capital city home prices rose by 1.6%, RP Data-Rismark figures show.
“We haven’t seen market conditions this strong since April 2009 for Sydney and May 2010 for Melbourne,” RP Data analyst Tim Lawless said.
For the record, Sydney house prices are up 8.3% over the past 12 months. They were up only 1.2% last year and were down 2.4% in 2011. Over the past five years, home prices have lifted at an average annual rate of 3.4%, in line with wage growth.
To create a property bubble, property prices need to be increasing at an unsustainable level over an extended period of time. A serious problem is created when the party comes to an end and we get a major crash in housing prices.
The three key issues that could affect the sustainability of current prices are:
- Rising interest rates
- Rapidly rising unemployment
- Oversupply of housing stock
While we currently have record low interest rates, even a few interest rate rises over the coming years will still see us at historically low levels. Given this we do not expect interest rates to be a trigger point.
Unemployment has been increasing however if the new Government can create an environment that is better for business then this shouldn’t be of concern. Business confidence has improved but the question will be – is it enough to stabilise employment levels.
Over supply appears to be many years away. The GFC put a screaming holt to most developments as finance suddenly dried up. Lending today for land development / subdivision and for residential housing is running at approximately half that of the peak in December 2008 and the figures have changed little over the last twelve months.
Population growth figures released by the NSW Department of Planning and Infrastructure indicate that Sydney will need another 100,000 more new houses than previously planned for, according to Urban Taskforce.
Clearly we should always be alert to signs of unsustainable growth in home prices. However at present we believe there is no need for undue concern. Sydney home prices are lifting in response to low interest rates after a period of under-performance.