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Market Commentary

March 2013

Share markets post further gains

Global share markets made strong gains in the three months to 31 March, benefiting from increasing optimism surrounding the global growth outlook. Investors reacted well to news that officials in Washington had finally reached a deal to avert the so-called ‘fiscal cliff'¹, signs the US recovery is gathering some momentum and further evidence that economic growth in China may be stabilising. Share markets were also well supported by a better-than-expected US reporting season and expectations that the world’s major central banks will maintain their respective stimulus programs for the foreseeable future. Limiting the gains were fresh euro-zone fears; most notably news that Cyprus had sought financial aid and further political uncertainty in Italy.

The Australian share market also made strong gains over the period; the local market benefiting from a much-better-than-expected December-half reporting season, some encouraging US and Chinese economic data and another strong lead from overseas markets.

RBA leaves rates on hold

The Reserve Bank of Australia (RBA) left the official cash rate unchanged at just 3.00% throughout the quarter encouraged by the general optimism surrounding the global growth outlook and the positive knock-on effect of earlier rate cuts. However, the RBA did maintain its easing bias, which means the bank is more likely to cut interest rates than raise them. Importantly, Australian interest rates are still relatively high compared to most other developed nations, giving the RBA plenty of scope to move should the domestic growth outlook deteriorate..

Australian economy expands in the December quarter

The Australian economy expanded by a further 0.6% in the final quarter of last year, in line with market expectations. The result was driven by strong jumps in public spending and exports. On an annual basis, the local economy grew by 3.1%. Importantly, the Australian economy has continued to perform relatively well despite some significant global headwinds and a strong Australian dollar.

Looking ahead

In recent years, markets have cycled between pessimism and optimism and this looks set to continue over the remainder of 2013. Whilst we expect the US economy to expand further this year, growth is likely to be much more moderate and this may lead to periodic bouts of uncertainty. The euro-zone will most likely remain intact, though recent events in Cyprus and Italy show that much work still needs to be done if the region is to get back on its feet any time soon. And whilst recent evidence suggests the Chinese economy may be stabilising, the growth outlook for 2013 and beyond nonetheless remains uncertain.
Importantly, share markets remain relatively good value and this should bode well for investors with a long-term investment horizon.

¹_{‘Fiscal cliff’ is the term used to describe the simultaneous expiry of tax breaks with the introduction of tax increases and spending cuts at the end of 2012; the result of which would place extra stress on the US recovery.}

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The investment landscape is changing. To achieve the outcomes you want, you need to stay focused on your goals, diversify your investments, do your research and adapt to the markets. A good place to start is to arm yourself with the right information. That's where we come in.

Each month we'll bring you our view of the world markets. We'll cover the major events from around the globe, and share some insights into what markets have been doing, what's coming next, and what it means for Australia.

2013

• March 2013
• February 2013
• January 2013

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The Aussie dollar

Who would have predicted that the Aussie dollar was going to reach the level of the U.S. dollar – let alone beat it and remain at such a high level? Despite falling prices for our commodities overseas, slowing demand from China and falling interest rates, the little Aussie battler is doing very well against its international peers. Russell predicts that our dollar may move back towards one dollar U.S. during the year and could even drop towards 90 cents if international markets start to get nervous.
For those lucky enough to have some extra dollars to spend, this means that the buying power of your money is still doing well. So, what does this suggest? Overseas holidays or overseas shopping (including buying goods online) may still be good value, particularly in countries where the local currency has failed to keep up with the Australian dollar. Of course, you still need to consider charges such as the cost of flights, delivery or credit card charges, but your money may go a little further while the dollar sits above the U.S. dollar.

The Australian share market

Almost half of all Australians own some shares, and given the roller-coaster ride that the market has given us over the past several years, it’s no wonder that investors are looking at the year ahead with some caution. However, we think that for many shareowners, the returns from dividends alone (approximately 4.75%) will sit above the average one-year term deposit rate of 4.25%.

Interest rates

The industry is factoring in one-half a percent cut to official interest rates in 2013, taking them to a record low of 2.5%. Great news for those with a mortgage – if your bank passes the reduction on, but not-so-good for those invested in cash or term deposits. Australian interest rates remain relatively high compared to those in the US and Europe, giving the RBA scope to move should the outlook deteriorate. Relying on term deposits or at call accounts could give you greater certainty, but if interest rates drop it is less likely returns will be higher than inflation – the rising cost of the goods and services that you use.

Bonds

10-year Australian government bonds are likely to increase yields only moderately in 2013 to around 3.5%. Again, this is getting close to the rate of inflation and therefore doesn’t offer much of a real return, although there is the positive of less volatility.

So what does it all mean for you?

The reality is that the future can often surprise both on the up and downside. We recognise that volatility will continue in the foreseeable future. However, the strong results from 2012, in particular, the recovery of growth assets, demonstrate the importance of investing through a well-diversified portfolio that adapts to the changing environment.
At Russell, we’re always looking out for changes in the market and we’ll be quick to take advantage of any opportunities that present themselves in the year ahead. Our aim is to reduce the bumpy ride for you and help you meet your long-term goals.

For a more comprehensive report you can read our Outlook for Australia 2013: From two speed to one speed or the 2013 Russell Global Market Outlook.