Australian equities performed reasonably well over the 2011 financial year, providing a positive return of 11.7% (S&P/ASX 200 Accumulation Index). The first three quarters of the year all achieved positive gains while a weaker June quarter prevented what could have been a very strong year for equities.
Macroeconomic issues began to play a pivotal role in the direction of the movement on the equity markets. In January, Australia experienced widespread flooding across Queensland, Northern NSW, and Victoria. February saw New Zealand hit with devastating earthquakes and the Middle East and Africa erupted with political unrest. In March, Japan was also hit with a devastating earthquake and subsequent tsunami which led to several nuclear issues.
On the domestic front, the stronger sectors were those exposed to emerging economies and markets. The Resources sector performed best over the year, however, this performance was held back by a weak Energy sector. The Industrial and Utility sectors also outperformed. On the flip side, Information Technology, Telecommunication Services and Consumer Discretionary performed very poorly as consumer confidence and spending dipped towards the end of the period.
Company earnings, particularly banks, provided results ahead of general consensus early on in the year. Investors’ paid strict attention to reported guidance figures, any sign of soft forecasting saw stocks avoided en masse. Corporate activity featured heavily in FY2011, mergers and acquisitions were evident across most sectors as companies’ decided to consolidate to firm up balance sheets. BHP Billiton performed a substantial off-market buyback, allowing its stock price to outperform pre and post the event.
The RBA managed to only raise interest rates once from 4.5% to 4.75%, while keeping a close eye on employment figures, retail spending and the hovering state of house prices, all while the AUD strengthening over 22c against the greenback, passing the parity mark and closing at US$1.07.
Equity markets responded to four main global issues that were predominant in 2010/2011, that is, financial debt in Europe, fiscal and economic indicators in the US, natural disasters in Australia and Japan and civil unrest in the Middle East and North Africa.
Greece was the first European nation to seek bailout from the ECB this year and subsequently, had its government bonds downgraded to junk status. The impact of the country’s balance sheet on Europe, however, was downplayed and activity in the euro area was surprisingly positive, with early indications pointing to a clear acceleration in growth, driven by the industrial sector with blockbuster growth in Germany driving most of the upside surprise. Additionally, European leaders announced that they had devised a recovery package for Greece that would also allay future debt problems in the region. The situation seemed controlled until Portugal, Spain and Ireland went on S&P downgrade watch and European debt contagion became a possible reality causing big sell offs in the European banking sector in 2011.
2010/2011 was positive for the US, as it sluggishly progressed through its post GFC recovery and released 600 billion into the economy as part of QE2. The prospect of additional central bank stimulus drove a significant improvement in risk assets in 2010 Q3, with the US equity market rallying by almost 9% in September. However, economic news was not all positive and every release of manufacturing, employment and housing data was met with knee jerk reactions which fuelled market volatility. Sentiment was further eroded on US government’s stalemate on how it would handle its rising debt as well as the S&P downgrade of US Government debt.
Japan suffered one of its biggest disasters to date, with an earthquake of a magnitude of 9 and the potential for nuclear fallout. The Japanese market suffered its worst two day fall in history, leading the Bank of Japan to pour a record 15 trillion yen into the world’s third-biggest economy, to restore liquidity and stabilise the Yen.
Note: This information is based on market commentary provided by Macquarie Investment Management Ltd. 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.
The 2010/11 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.