Brian reviews events in Australian and overseas markets during 2012
How did markets perform in 2012?
Share market investors enjoyed very strong returns during the last three months of 2012, capping an impressive year for world share markets.
The strength of the Australian dollar has meant hedged global shares, which returned 19.8%, outperformed unhedged global shares this year by 4.5%.
Fixed income investors have experienced solid performance as lower bond yields over the past few years have boosted returns. However, returns have moderated more recently, reflecting the very low yields now on offer.
Non-government securities have posted stronger returns than sovereign bonds. Lower quality corporate securities have provided particularly strong returns lately, as investors continue to chase higher yields.
After a disastrous performance during the worst of the global financial crisis, listed real estate assets have shown amazing gains over the past year. The higher yields that were offered on these securities proved extremely attractive to investors.
What about global economic growth?
The global economy is likely to have posted only modest growth in 2012. Global growth continues to be hampered by high levels of private sector indebtedness in a range of countries, and policy makers’ inability or unwillingness to stimulate growth, particularly (but far from exclusively) in Europe.
Of the three major developed economies, only the US ended 2012 with any kind of momentum, although the US recovery remains one of the weakest on record.
Following President Obama’s re-election in November, attention quickly turned to the impending massive tightening of fiscal policy that was legislated to take effect in January – the so-called fiscal cliff. After protracted negotiations, much of the tightening has been avoided – in particular, tax increases will now only apply to high income earners, and spending cut decisions have been delayed.
However, US budgetary developments are likely to remain a source of uncertainty and concern for financial markets for some time.
Was any progress made in the eurozone?
Across the Atlantic, the picture remains very different. Much of the eurozone remains in recession. Economic conditions on the European periphery remain catastrophic. Austerity measures implemented across much of the eurozone and the UK designed to rein in fiscal deficits and stabilise public debt have achieved neither aim: tighter fiscal policy has tended to worsen economic conditions and further undermine public finances.
However, financial markets became more hopeful of a resolution to the eurozone crisis as 2012 progressed. In particular, markets greeted positively the actions of the European Central Bank, firstly to inject massive liquidity into the European banking system and later in 2012, to announce its preparedness to purchase European sovereign debt outright.
How did emerging economies fare?
The emerging economies as a group posted respectable, but far from uniform, growth. China’s economy has slowed over the past two years, from an annual growth rate of 11.9% in the first quarter of 2010 to 7.7% for the September quarter for 2012.
Despite that slowdown, China’s reported growth is still spectacular by any yardstick. In 2012, it is likely to have accounted for around half of the reported growth in the emerging economies, and about a quarter of overall world growth.
What about closer to home?
Australia’s economy slowed over the course of 2012, but still posted an internationally respectable 3.1% growth in output for the year to September.
However, the boost to Australia’s national income from the boom in our terms of trade came to an end in 2012. While still historically high, Australia’s terms of trade has fallen by around 14% from its recent peak as prices for our key resource exports have declined. These declines, together with an uncertain global environment, have seen a winding back in capital spending plans, particularly in the mining industry.
Concerns over Australia’s growth prospects, as well as an uncertain global environment, prompted the Reserve Bank of Australia to reduce official interest rates on four occasions during the year. This took the cash rate down to its global financial crisis low of 3%.
Late in 2012, Treasurer Wayne Swan announced that the government was no longer committed to achieving a surplus in the current fiscal year. Achieving a surplus would have required further fiscal tightening, which could have adversely affected growth in an already uncertain economic environment.