Kerry reviews events in Australian and overseas markets during November
What happened in the markets in November?
At the start of the month, news focused on the aftermath of Hurricane Sandy and the US presidential election. At the same time, there was a change in China’s leadership, but this received much less coverage.
Since the US election, the impending US ‘fiscal cliff’ has taken over headlines.
In terms of market performance, November was a mixed month. World share prices were up about 1.3%, with the US up 0.3% and Europe up 2.0%, while Australia’s share market dropped 0.3%. Overall, the major share markets have risen this year.
Bond markets were similarly mixed, with US 10-year bond yields falling but Australian bond yields rising.
The Australian dollar remained strong, rising through November to end just above US$1.04.
What’s the news on the US ‘fiscal cliff’?
The looming US ‘fiscal cliff’ has cast a big shadow over share markets. The cliff is caused by the automatic increase in taxes and spending cuts that are due in 2013 unless an alternative agreement can be made by US policymakers.
If there’s no resolution, market participants fear the US economy will fall back into recession. This is despite recent signs of stronger US growth. Data shows improvement in the US housing market, rising consumer confidence and expanding business activity.
Has Europe made progress on its problems?
Peripheral Europe continues to struggle with austerity measures, debt levels and rising unemployment. After a few false starts, Greece secured yet another deal to reduce its debt by extending repayment periods and lowering interest rates. However, the market’s optimism over this latest deal was short-lived.
It’s not just the periphery that is struggling with lack of agreement on the path forward. Most recently, the European Union failed to agree on a new seven-year budget for the euro bloc. The only thing they could agree to was ending current talks and trying again next year.
Meanwhile, there is growing concern that Europe’s recession is moving from the periphery towards the core. Moody’s stripped France of its AAA credit rating this month and maintained its negative outlook.
There has also been weaker production data coming out of Germany, France and Italy. In fact, German growth has slowed to near zero due to a weaker export economy.
In contrast, the UK has recorded positive GDP growth, bringing an end to the UK’s double-dip recession.
What about closer to home?
China has been slowing, but is now showing signs of stabilising at a lower level of growth. With a new leadership team, it’s possible that reforms could be accelerated. However, the new leaders are considered fairly conservative, and unlikely to embrace any major economic reforms.
Slowing Chinese growth is impacting the capital investment plans of the Australian miners. Lower commodity prices and a slower global economy are key risks for Australia, even though Australian growth has been close to trend for the last year.
Because of this, the Reserve Bank of Australia cut interest rates by 0.25% at its December meeting. Cash rates are now at 3% – equal to the lowest they reached during the GFC. This tends to make the returns on term deposits and cash products less appealing than other investment options.
Even with falling cash rates, the Australian dollar has remained high. The humble Aussie dollar was considered by some to have entered the big league in November, after the IMF’s inclusion of our dollar as an ‘official foreign exchange reserve currency’. In practice, this is just a change of classification, as the Australian dollar has been a reserve currency for some central banks for many years. It certainly doesn’t make the Australian dollar a safe haven currency.
There’s always hope that the US economic recovery could become self-sustaining, Europe will make better progress on resolving its banking, fiscal and economic issues and China will benefit from its leadership change.
However, there’s a great deal of uncertainty about the way forward. It’s a time when unconventional actions by central banks have made traditional safe haven investments, like debt, expensive. The implications of fiscal austerity measures also challenge returns from shares.
In this environment, we believe that risk management, and avoiding risks that aren’t appropriately rewarded, are critical in managing our funds.
Our next written update will be in January 2013 and our next video in February.