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Market Commentary

March quarter 2012

Optimism returns to markets

Global share markets made strong gains in the March quarter amid further moves by European officials to help ease the region's debt crisis and expectations that the US recovery can be sustained. Greece returned to centre stage over the period as European finance ministers debated and then approved a second bailout package that enabled the debt-laden nation to meet its immediate financing needs. Meanwhile, recent jobs and manufacturing figures in the US suggest the recovery there is gathering momentum. Sentiment was also boosted by comments from US Federal Reserve chairman, Ben Bernanke, who reaffirmed the central bank's commitment to stimulating economic growth.

The Australian share market also made good gains over the period, driven mostly by external factors, including positive news out of Europe and the US, expectations of lower interest rates in China and a strong lead from overseas markets.

Reserve Bank leaves rates on hold

Despite expectations to the contrary, the Reserve Bank of Australia (RBA) left interest rates on hold during the quarter. After cutting rates in November and December, the RBA appears to have adopted a 'wait and see' approach towards monetary policy. Going forward, the bank will focus on events in Europe; particularly as inflation remains well within the RBA's 2-3% target band. Importantly, with domestic interest rates still relatively high compared to other countries, the bank has plenty of room to move should the growth outlook deteriorate.

Looking ahead

The strong gains in share markets so far this year reflect a clear and positive shift in investor sentiment that stems largely from speculation the worst of Europe's debt crisis is over and expectations the US recovery will continue. But whilst the outlook for markets has improved, some risks remain. In Europe, the solvency of Greece and other troubled nations will continue to make headlines until officials there can develop a firmer resolution to the region's debt woes. Further, slower growth in China will have a knock-on effect in Australia due to our reliance on Chinese demand for our raw materials. However, it's worth keeping in mind that China's economy is still expected to expand by a very respectable 8.0% in 2012.

Overall, market conditions are now more favourable for riskier assets and this should result in further gains for share markets throughout 2012.