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Economic update

Phillip Gray and Donal Curtin   |  19 Dec 2012Text size  Decrease  Increase  |  

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Phillip Gray is the editorial and communications manager and Donal Curtin is a consulting economist with Morningstar.


Outlook for investment markets

Sharemarkets have recovered from their November weakness as investors have become less concerned about the US 'fiscal cliff', the Eurozone's debt problems, and global growth. The risks have diminished rather than vanished, but the prospects are for a better 2013, which should benefit growth assets. The prospect of lower US interest rates until 2015 has triggered a surge of interest in bagging the income yields still available, and there's now little value left in some fixed interest and property markets. The important question locally is the scale and timing of a slowdown in activity as the resources sector comes off its peak and the potential impact on growth assets.


Australian cash and fixed interest – review

Short-term interest rates fell over the past month, the 90-day bank bill yield dropping from 3.30 to 3.10 percent, reflecting the Reserve Bank of Australia's  0.25 percent cash rate cut to three percent from 5 December. Longer-term interest rates edged up a little, in line with a slight uptick in overseas bond yields: the 10-year swap rate increased from 3.70 to 3.90 percent, and the 10-year Commonwealth bond yield from three to 3.35 percent. The $A strengthened over the month, up from US$1.035 to US$1.055, and recorded a 1.80 percent overall trade-weighted rise.


Australian cash and fixed interest – outlook

In its most recent policy decision, the Reserve Bank gave a clear explanation of the rationale for its latest interest rate cut – inflation on track, but the mining boom coming off its peak, so other parts of the economy need extra support to grow faster – but gave little hint of what it might do next. The futures market expects a 90-day yield of 2.90 percent in 2013, consistent with another 0.25 percent cut to the cash rate. The major forecasters are generally in the same camp, some picking an unchanged cash rate, some one more decrease, and a few picking that the expected slowdown in the Australian economy will be quite serious, and require significantly looser monetary policy.

Before the US Federal Reserve's recent announcement that it would keep monetary policy very supportive until unemployment dropped below 6.50 percent, local forecasters had been expecting a modest and gradual rise in local bond yields. The news that US interest rates are likely to stay ultra-low out to 2015 suggests that local bond yields may still rise, but very modestly and slowly.

While there is universal agreement that the $A is overvalued from an export competitiveness point of view, the likelihood of any substantial near-term drop looks low. Central banks in the US, United Kingdom, Eurozone, and Japan are all printing money apace; our Reserve Bank has not cut short-term rates to zero or thereabouts; and overseas investors' willingness to give the $A a go has increased with lower levels of Eurozone anxiety. A steady or even higher $A therefore looks plausible in current market conditions.


Australian and international property – review

Australian listed property shared in the wider recovery of the Australian sharemarket from its selloff in November, the S&P/ASX200 A-REIT Index up 3.20 percent over the past month.

International property also followed the global sharemarket recovery, the EPRA/NAREIT Global Index up 5.10 percent in $US for the month and the Global ex-Australia Index up a very similar five percent. Europe was the best-performing region for the month, up 6.60 percent, helped by a 7.90 percent rise in the German market. The UK gained 7.30 percent. Asia was up 4.80 percent, Japan gained 3.10 percent, and US REITs rose by 3.60 percent.