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Market Commentary

April 2013

Global share markets higher

Global share markets made good gains in April amid expectations the global recovery can be sustained. Specifically, investors were encouraged by some positive US earnings results and signs that the country's key jobs and housing markets are beginning to improve. Markets were also well supported by easing euro-zone concerns following Cyprus's successful bailout and news that the political deadlock in Italy had finally been broken. Limiting the gains were softer Chinese growth figures which showed that the world's second-biggest economy grew at an annual pace of 7.7% in the first quarter - less than the 8.0% the market had been expecting.

Here in Australia the share market made strong gains on the back of speculation the Reserve Bank of Australia (RBA) may move to cut interest rates sooner rather than later. Another positive lead from overseas markets was also beneficial. Gains were limited by weaker commodity prices and softer Chinese growth figures.

Inflation better than expected

Domestic prices rose by less than expected in the first quarter, with the consumer price index gaining just 0.4% in the three months to 31 March. The market had expected a gain of 0.6%. On an annual basis, prices were 2.5% higher - right in the middle of the RBA's 2-3% target range. The biggest prices gains were seen in pharmaceutical products (7.6%), tertiary education (6.5%) and tobacco (3.7%). By contrast, fruit (-7.0%) and furniture (-6.8%) recorded the biggest declines.

Interest rates on hold...for now

The RBA left interest rates on hold at just 3.00% following its early April board meeting, noting that the economy is beginning to feel the benefits of the bank's earlier rate cuts in October and December. However, the RBA still clearly retains an easing bias, particularly with mining investment slowing and activity within the non-mining sectors yet to really pick up. Importantly, the latest inflation reading will give the RBA additional scope to cut interest rates should the domestic growth outlook deteriorate in the near term.

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.

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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.

#1 – Sharemarkets finished 2012 on a high note. How did Russell's portfolios fare?

2012 was a very strong year for the Russell diversified portfolios. Both the Russell Balanced and Balanced Opportunities portfolios were two of the top 10 performing funds in the Australian market for the year.

It was also a year of strong returns in both share and bond markets, with both asset classes achieving returns of 10% or more.

However, it was also a year of high volatility, with investors very concerned about a series of macro risks, in the United States, Europe and China. The success of the Russell diversified portfolios in 2012 required us to adapt our portfolios to navigate those risks.

For example, we emphasised asset classes like high-yield bonds and emerging markets bonds; strategies that achieved returns of 20% or more. But these returns were achieved with much less volatility and sensitivity to share markets.

Also important for success in 2012 was strong active stock selection, and in the December quarter we saw very strong selection all across our portfolios, in both shares, alternatives and bonds.

#2 – Do you expect more of the same for 2013?

While 2012 was a high return, high volatility market environment, Russell expects 2013 to be a lower return, high volatility environment.

We expect returns to be lower in 2013 in bond markets because we start this year with much lower interest rates, both in Australia and around the world.

Similarly, in share markets we expect lower returns because valuations start the year much closer to fair value, rather than cheap as they were a year ago.

Risks, though, remain undiminished. A number of the macro risks from Europe and the United States that dominated 2012 have merely been deferred to 2013, rather than solved. And we expect them to reassert themselves and concern investors in 2013.

Russell Investments’ success in 2013 is going to require us to further adapt our diversified portfolios. We will need to adapt not only into new asset classes, but also to evolve our strategies to capture new opportunities within existing asset classes.

^{Issued by Total Risk Management Pty Ltd ABN 62 008 644 353, AFSL 238790 (TRM).This document provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. The information has been compiled from sources considered to be reliable, but is not guaranteed. Past performance is not a reliable indicator of future performance. TRM is the trustee of the Russell SuperSolution Master Trust ABN 89 384 753 567 and the issuer of the Product Disclosure Statement (PDS) for the Russell SuperSolution Master Trust. The PDS can be obtained by phoning 1800 555 667 or by visiting www.russell.com.au Any potential investor should consider the latest PDS in deciding whether to acquire, or to continue to hold, an investment in any Russell product. TRM is part of Russell Investments (Russell). Russell or its associates, officers or employees may have interests in the financial products referred to in this document by acting in various roles including broker or adviser, and may receive fees, brokerage or commissions for acting in these capacities. In addition, Russell or its associates, officers or employees may buy or sell the financial products as principal or agent.}