Cash and fixed interest
Cash and Fixed Interest
Bond markets continued their positive risk rally through the first half of the financial year consistent with the view that the global economy had entered a recovery phase. The Reserve Bank of Australia surprised the market by embarking on a hiking cycle sooner than anticipated, raising the cash rate by 0.25% in October, November and December and taking the cash rate to 3.75% by the end of the calendar year.
Concerns regarding sovereign risk dominated headlines in the second half of the financial year resulting in a flight to quality to US Treasuries and German Bonds. Although the European Union and the European Central Bank (ECB) announced a large European rescue package this only gave a short relief to bond markets. Towards the end of the financial year, Greece was downgraded and taken out of most global indices. In Australia, the RBA hiked rates for another three consecutive months in March, April and May by 0.25% each time bringing the official cash rate to 4.50% by the end of June 2010, primarily driven by strong economic data.
The Australian Listed Property market bounced back over 20% in the year to 30 June 2010 as debt and equity markets stabilised and Listed Property stocks brought their gearing levels back under control. The rebound was fairly short and sharp, with the sector up 30% in the quarter to 30 September and then for the following nine months tracked slowly down.
The previous financial year (to June 2009) saw the onset of the global financial crisis with most developed economies falling into recession, debt becoming scarce (especially for real estate companies), debt margins widening, and property valuations falling as transactions came to a virtual standstill. Listed Property companies, faced with increasing gearing levels and lack of buyers for their property assets, were forced to raise significant levels of equity in order to get their balance sheets under control. This helped restore investor confidence and as signs started to emerge in mid-2009 that debt markets were again opening up, the sector rallied strongly.
For the last nine months of the 2010 financial year, investors refocussed on latent signs of weakness in the global economy including the Greek debt crisis and a weaker than expected pick up in US activity. This saw momentum stall in the Listed Property market, which had started to price in a strong recovery in direct property markets.
Australian equities turned in a strong performance over the 2010 financial year (FY2010) to register a positive return of 13.2% (S&P/ASX200 Accumulation Index). The first three quarters of the year all achieved strong gains while a weaker June quarter took some shine off what was an otherwise improved year for equities. Macroeconomic issues shaped investor sentiment throughout FY2010.
Factors such as the strains facing indebted European governments, potential fiscal austerity measures curbing growth, a slowing Chinese economy and the proposed domestic tax on resources all contributed to a re-evaluation of the global economic recovery.
On the domestic equity front, the stronger sectors were those exposed to recovering economies and markets: the Banks outperformed as did Materials, though the wider Resources group was held back by a weak Energy sector. The latter was hit by the Government's proposal in May to introduce a Resources Super Profits Tax (RSPT), which weighed heavily on the prospective value of gas projects. One of the other laggards over FY2010, Telco's, saw a late rally when Telstra agreed preliminary terms of participation in the government's National Broadband Network initiative. Company earnings growth improved as economies regained momentum, though towards the end of the period some softening of expectations was evident. In large part due to the Henry Review of Australia's tax system, a number of sectors attracted the focus of Government and regulators. These included superannuation providers, banks, telcos, exchange providers, gaming and of course, resources via the RSPT. Mergers & Acquisitions continued to feature with the merger of Lihir and Newcrest and rival bids for AXA from NAB and AMP. Australia's resource-rich economy was increasingly targeted by foreign companies, with the takeover of several coal miners potentially a sign of things to come.
Over the course of FY2010, most major international central banks remained on hold – the US Federal Reserve's target range remained at 0.00%-0.25%. The Australian economy bore witness to the efficacy of fiscal and monetary stimulus with a strong rebound in employment, solid retail spending and rising house prices. Australia confirmed its position as "the lucky country" by posting GDP growth while maintaining inflation to reasonable levels.
The equity markets in 2009/2010 were divided into two key phases. In months leading to the end of 2009, optimism returned to the market with equities continuing the rally from the previous quarter. However, during 2010, it became evident that the recovery in the global economy was unlikely to be a strong one given the strains that continue to exist in many financial markets and the balance sheet repair required to be undertaken by global financial institutions and US households. Investors became increasingly concerned over the possibility of a double dip recession and the equity markets remained range bound for most of 2010. For the 12 months to 30 June 2010, hedged international equities appreciated 14% and unhedged equities returned -5.2% in Australian Dollar terms.
The key theme leading into the calendar year end of 2009 was the improvement of sentiment in the recovery of the global economy. As expected, Emerging markets led the recovery, with China ahead of the pack with an effective implementation of their stimulus package.
In the US, data points showed clear signs of a pick-up in housing activity, led by a strong rebound in home sales. This in turn saw a sharp fall in the stock of homes for sale and a marked slowing in the pace of decline in house prices - an important development following three years of significant declines in house prices and wealth. With the manufacturing sector expanding strongly, the composite ISM survey (which provides the first piece of news on the economy every month and provides the earliest clues of how the economy has fared during the previous four weeks) has accelerated to a level that historically has been consistent with growth in the US economy of around 4%. However, early on in 2010, data flow began to disappoint, with US housing starts and construction activity both recording sharp declines and industrial production easing back slightly following a few solid monthly gains. At the same time, fears over the continued fragile state of financial markets and exposure to poor lending practices were brought to the fore as concerns emerged over the debt of Government related entities in Dubai.
In the final quarter, the state of sovereign finances in peripheral euro area economies drove market returns as concerns mounted over the state of sovereign finances in Greece and other peripheral Euro area economies. The situation escalated early in April as Greek solvency concerns spilled over into an inspired liquidity crisis throughout most of the region which raised fears over the potential for a second global financial crisis. The resulting increase in risk aversion drove global equity markets sharply lower. Analysts have subsequently moved to lower projections for growth in several countries over the coming year whilst pushing down their expectations for official central bank interest rates in most countries.
As 2009/2010 concluded, monetary authorities continue to pledge significant stimulus to support economic recovery. The US Federal Reserve continued to note that "they anticipate that economic conditions are likely to warrant exceptionally low levels of the Federal funds rate for an extended period", while the ECB's latest forecasts anticipate only very modest growth in GDP over the next twelve months. The need for cautiousness was also reiterated by finance ministers and central bank Governors at the latest G20 meeting as they continue to maintain expansionary monetary and fiscal policies. Improvement in global labour markets will likely be gradual, which will see major central banks keep rates at their current extremely low levels for most, if not all, of 2010.
Note: This information is based on market commentary provided by Macquarie Investment Management Ltd2. It relates to investment markets generally. It does not constitute financial advice and is of a general nature only without taking into account a person’s individual circumstances or needs.
2 The 2009/10 Market Review information is based on reports provided by Macquarie investment Management Limited ABN 66 002 867 003 AFSL 237492. We haven't verified its accuracy so we can't guarantee that it is correct, and accept no liability for inaccuracies, errors or omissions. It is very important to note this information is general market commentary only and past performance is not indicative of future performance.