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

Investment markets have been in a better mood over the past month, although are likely to remain skittish over bad news, especially about the prolonged eurozone debt problems. Although forecasters remain positive about the outlook for the Australian economy, weaker employment numbers and gloomy business confidence may be pointers to a slower patch for the local sharemarket. The outlook for international equities remains as it has done for the past year – better than the market turbulence would suggest.

Australian cash and fixed interest – review


Australian short-term interest rates fell over the past quarter. Ninety-day bank bills were yielding 4.50 percent just before Christmas, and have since fallen further to 4.36 percent. The latest fall reflected the Reserve Bank of Australia's 0.25 percent cut in the cash rate from 7 December, and market anticipation of further easings to come. Longer-term interest rates have continued to reflect the state of investor confidence about the Eurozone debt problems and the global economic outlook. Ten-year government bond yields were 3.67 percent on 30 December 2011, but have risen modestly to about 3.89 percent on greater hope of a relatively orderly Eurozone outcome. The $A has again recently tracked changes in global investor sentiment, falling back against the $US late last year as worries about Europe resurfaced. More recently, as hopes of a resolution have increased, the $A has risen back comfortably over parity with the $US. The pattern in overall trade-weighted terms has been the same.

Australian cash and fixed interest – outlook


Although the futures market is predicting that 90-day bank bills will be substantially lower by the end of 2012 – down to 3.60 – 3.70 percent – it's more likely that the Reserve Bank will keep existing interest rates on hold. Current economic and monetary conditions are consistent with the Bank's inflation rate target, which means that the Bank is unlikely to have to adjust monetary policy. It is possible that some external shock – such as a sharper-than-anticipated slowdown in China – could force the Bank's hand, but this also appears unlikely. The $A had benefitted from a combination of more 'risk-on' appetite from foreign investors, very strong terms of trade, and interest rate differentials that had made it relatively attractive. The second two factors are now less helpful, although improved investor sentiment might continue to be supportive for the $A.

Australian and international property – review


Australian listed property has been a relatively slow and steady performer, the S&P/ASX AREIT Index up 1.90 percent in capital value and up 3.70 percent in total return over the three months to 25 January 2012.  The sector shared a low point with wider sharemarkets on 4 October, but did not have as strong a rise in October, nor the same scale of relapse in November and December.

Global listed property moved in line with wider global sharemarkets over the past quarter, the EPRA/NAREIT index of global property (ex-Australia) hedged into $A rising by 5.60 percent over the past three months. The US market was responsible for most of the rise, up 7.40 percent, understandable given the improved economic outlook. Asian property also did quite well, with a 3.50 percent rise. The slower-growing or recessionary economies brought up the rear – Europe ex-United Kingdom (-0.70 percent), the UK (-0.90 percent), and Japan (-4.0 percent).