Market Review
The final quarter of the 2013 calendar year was again positive for the ASX/200 which increased 133.3 points or 2.55% from October to December. October 28th saw the ASX/200 reach its highest level in over 5 years with the index reaching 5,457.3. The quarter proved to be a volatile one with the market re-testing the 5,000 point level (although not quite reaching it) during mid-December, only to bounce back and close at 5,352.2 on December 31st2013.
For 2013 we saw the ASX/200 increase from 4,648.9 to 5,353.2 an increase of 704.3 points or 15.15% which is a very healthy return! We point out that the market is still trading 22.11% lower than the high from 1st November 2007 of 6,873.20.
During the month of December Telco’s were the best performing section gaining 4.3%. Energy was also strong posting gains of 3.3% for the month. Listed Property was the worst performing sector for December down 1.3%. Financial stocks were also negative 1%.
On 18th December US Fed Chairman Ben Bernanke announced that tapering would begin given positive economic data coming out of the US. Stock markets rallied strongly on the news. The Fed also indicated that it was biased toward keeping the Fed funds rate near zero for longer than it had previously promised.
Economic Update
The RBA left interest rates on hold at 2.5%. Further rate cuts are now looking unlikely as the Australian dollar continues to fall (the AUD$ finished the 2013 year at $0.892 a drop of 1.9%. It should be noted that interest rates are at 40 year lows and mortgage holders need to consider if it is appropriate to fix rates over the coming months.
The RBA Board minutes provided new insight to their perception of Australian and global economic conditions. The members of the Board have agreed to retain a mild easing bias, stating their intention is “not to close off the possibility of reducing (rates) further should that be appropriate to support sustainable growth in economic activity, consistent with the inflation target.”
Governor Stevens appeared before the House of Representatives Economics Standing Committee on 18 December. His opening statement indicated that below trend GDP growth of 2% to 3% per annum is the most likely outcome for 2014.
A significant worsening in our fiscal position was reported in the Australian Government’s Mid-Year Economic and Fiscal Outlook (MYEFO) released on 17th December. The Australian budget deficit for 2013/14 is now estimated at $A47 billion, 3% of GDP, substantially higher than the budget-time estimate (by the previous government) of $A18 billion or 1.1% of GDP. Remember Wayne Swan was still predicting an $A1 billion surplus for 2012/2013 banc in December 2012. Hence the final result is a staggering $A48 billion variation.
Reports continue to indicate that our economic growth has continued to slow. GDP rose by a slightly lower-than-expected 0.6% over the quarter. This took the annual economic growth rate down marginally to 2.3% for the year.
The consumer confidence index showed a decline of 5.3 points (-4.8%) from a near three year high of 110.3 points in November to a five month low of 105.0 points in December.
Employment increased by 21,000 jobs in November, but the unemployment rate rose by 0.1% points to 5.8%.
2013 In Review
Australia had a relatively poor year in 2013 with growth slowing, unemployment rising and sentiment being subdued. Both business and consumer confidence were held back by political concerns including a nine-month election campaign. The Reserve Bank cut the cash rate to a new record low of 2.5% but made it plain that it now wants to see further monetary stimulus come from the exchange rate rather than the cash rate.
2013 proved to be a better year for equities than for bonds, although not all equity markets performed well. The S&P 500 Price index posted a near 30% gain for the year, double the ASX 200’s still respectable 15%, and well ahead of emerging markets -5%. Bonds delivered far less impressive returns, although a hedged exposure to global high yield bonds still produced a 10% return. The other big moves for the year were gold’s 28% decline and the much awaited retracement of the $A. Gold fell as investors reassessed their concerns about global inflation and the impact of the Taper in the US.
The unwinding of the resources boom and a stubbornly high Australian dollar contributed to softening economic activity throughout the year. In turn, the labour market deteriorated and the unemployment rate rose towards 6%. The Reserve Bank responded by cutting the cash rate. The $A did eventually start to fall and finished the year at US$0.89.
The housing market responded to record low interest rates with households and investors pushing prices up in the second half the year. Significant gains were recorded in some parts of the major capital cities leading commentators to warn of an impending bubble in house prices. However, as in the US, there are signs that rising dwelling prices are a necessary part of the process of encouraging construction activity, especially in the apartment sector.
The relative performance of the major sectors in the equity market reflected developments in the underlying economy. Financials dominated once again, contributing around 60% of the market’s total gain. Materials underperformed, especially in the first half of the year on concerns about global growth and the end of the resources boom. General Motor’s decision to cease production in Australia by 2017 exemplified the challenges facing the manufacturing sector.
Best & Worse Performing Sectors of 2013
2013 was a good year for most equities, but not gold or the Australian Dollar!
Financial stocks dominated the Australian equity market rally again in 2013
Looking ahead
What does all this mean for financial markets and potential opportunities for investors? We think the following points are important to bear in mind:
- Interest rates around the world will remain low throughout 2014;
- The Reserve Bank is unlikely to cut interest rates again;
- Low inflation, improving growth, low interest rates and on-going central bank support is generally a favorable environment for growth assets compared with defensive assets;
- Investors have started rotating out of the defensive bond allocations built up after the GFC and back into equities and there seems scope for this rotation to continue;
- Yields on government bonds are likely to rise further in 2014, driven by better economic growth and the Taper; however a disruptive sell-off in bonds is not expected;
- The demand for yield is likely to continue as low cash rates persist. This means that already expensive high yield assets are likely to become even more overvalued before they eventually sell off; if there is any risk of a bubble in financial markets caused by QE we think it is in high yield and low quality credit rather than equities;
- Developed large cap equity markets are no longer cheap but neither are they alarmingly expensive. These markets could well have another good year in 2014, though not as good as 2013;
- The US and European equity markets may outperform Japan in 2014; the Topix returned over 50% in 2013 but faces a tougher 2014;
- The vulnerable emerging markets are likely to struggle further in 2014 as the US dollar appreciates with the Taper. Good country selection will be essential to successful emerging markets investing in the coming year;
- The Australian equity market has ground to catch up on the international equity markets after underperforming in 2013; this will require clear signs of economic improvement. The same applies to domestic small caps versus large caps;
- The Australian dollar is likely to fall further in 2014 towards the US$0.80 – $0.85 range;
- Gold may continue to struggle as the Taper proceeds, the US dollar appreciates and inflation remains under control;
- Increased volatility within and between asset classes may provide a better environment for good active management in 2014, including selected absolute return strategies.