Quarterly Update April 2013

Posted in Wealth
04/04/2013 Level One

Market Review

The first quarter of 2013 was again positive for the Australian Share market. The ASX/200 rose 317.55 points or 6.83% from 1st January 2013 – 28th March 2013. The ASX200 climbed through the 5,000 point level in February before finishing the quarter down slightly at 4,966.50 points on 28th March 2013. We note this is the first time the market has reached the 5,000 point level since February 2008.

January and February were particularly strong while March proved to be volatile with the ASX/200 hitting 5,146.90 points on 11th March before finishing the month down 137.58 points or negative 2.7%. This was the first negative performance in a month since May 2012.

We note that the Australian Share market is still trading 27.74% below the market high from 1st November 2007 (6,873.20). Interestingly the US’s Dow Jones closed above 14,000 points on 1st February 2013, which is the first time the Dow had been so high since October 2007. The Dow continued to climb, surpassing its prior all time record of 14,164.53 (from 9th October 2007) to close at 14,662.01 on April 2nd, 2013.

We note that UBS have revised their year-end ASX200 price target from 5,000 points to 5,250 points. This is on the back of low real interest rates and continued improvements within the US.

The continued uncertainty around the EU bailout of Cyprus has kept markets subdued during the past few weeks. This re-emergence of the European Sovereign debt issues highlights that resolving these debt problems will take a long time.

On the interest rate front, The Reserve Bank of Australia again left interest rates unchanged over the quarter with the last interest rate cut occurring in December 2012. We expect that interest rates may be cut again sometime over the coming months but we maintain we are very close to the bottom of the cycle. Borrowers should consider locking in either all or part of their mortgage now or over the next few months.

The interest rate on term deposits has now dropped to the low 4% range. With inflation currently sitting at 2.2% the real return from Term Deposits is currently only around 2%. These low rates are seeing more money move out of the safe haven of cash and term deposits and back into the share market where grossed-up dividend rates on the banking stocks are still around 7% – 8%.

We continue to expect volatility within the market but given the current valuations and income supporting Australian Shares we expect further gains throughout 2013.


Economic Update

The last quarter saw reports continuing to indicate that the Australian economy is slowing further.

The Reserve Bank of Australia’s latest announcements show that it expects our economy to be weaker than last year. The RBA has also noted that, although it has left interest rates on hold at 3% at both the February and March meetings, the still high Australian dollar and low inflation may still see more cuts made if the economy continues to slow. The consensus vote amongst economists is that the RBA will cut rates again at least once this year.

Commentary was also made by the RBA about the stubbornly high Australian dollar, suggesting that they are less worried about the currency and are not taking any action here to weaken the $A; neither directly via the currency market nor indirectly through interest rates.

We have seen a slip back against the $US in the recent weeks, however it is believed that the $A will remain high for the coming months. When better economic data comes out of China, we may see a shift in the $A then when it can be valued more accurately.

The RBA downgraded its near-term growth and inflation forecasts and now expects GDP growth of 2.5% as at June 2013 (was 2.75%). Underlying inflation for the same timeframe is now forecast at 2.5% (was 2.75%). By the end of 2013, growth is now forecast in a 2% to 3% range (was 2.25% to 3.25%) while inflation is forecast within the 2% to 3% target range until mid-2015.

Building approvals and retail sales were disappointing and the unemployment rate is expected to rise in 2013 from its current rate of 5.4% (despite February announced jobs figures).

Private capital expenditure (capex) data was released for Q4 2012, with a fall of 1.2% for the quarter. Of greater importance was the first intentions survey for 2013/14. Currently A$168 billion of capex is expected in 2012/13, compared to $A155 billion in 2011/12. A total of $A152 billion is anticipated in 2013/14. While the peak in mining investment is expected this year, this survey suggests the drop off in expenditure will be gradual rather than sudden. See chart below of capex intentions.


Exchange Traded Funds – ETFs

An exchange-traded fund (ETF) is an investment fund traded on a stock exchange, similar to shares. ETF’s are also like managed funds as they are pooled investments in which investors buy units. An ETF holds assets such as stocks, commodities, listed property trusts, or bonds, and trades close to its net asset value over the course of the trading day.

Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. They also pay regular dividends similar to most stocks.

An example of an ETF could be an ETF that tracks the top 20 ASX shares, a Listed Property ETF or a Global Healthcare Sector ETF.

An ETF could be a suitable investment for a smaller investor looking to enter the market where they will not be able to obtain the level of diversification given the size of their investment funds. ETF’s allow you to gain exposure to many different sectors and diversified asset allocations for only a small investment. Additionally ETF’s are highly liquid as they are traded on the ASX.

ETF’s can also be utilised for specific sector tilting such as resources, banking or healthcare. With one acquisition you could potentially gain access to the top 60 or so resource stocks.

Negative characteristics of an ETF include that they are tracking the index. If the value of say CBA goes up, they buy more to keep their holding in-line with the index. Similarly if say BHP goes down they may need to reduce their holding to stay in-line with the index.

Tax efficiency can also be a problem with ETF’s and where possible it is preferable to actually hold direct shares as opposed to an ETF. An ETF must payout all income received which means dividend payments can be quite volatile.

Additionally the buy / sell price often has a gap brought about by inefficiencies within the market and at times when trading is thin. This affects your buy in and sale price which can significantly alter your returns.


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