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Volatility spikes set to continue

Staff  |  22 Jan 2013Text size  Decrease  Increase  |  

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This article was originally published by staff at InvestorDaily, a Sterling publication.


The Australian market is likely to experience short-term volatility spikes throughout 2013 despite recent growth in equities, according to State Street Global Advisors (SSgA).

While the S&P/ASX 200 All Australian Accumulation Index generated a 20 per cent return in 2012, it is likely that prevailing global concerns will continue to affect the market, despite 2012 ending with the lowest levels of volatility since 2007.

"Looking forward, it is difficult to see volatility falling further, given current levels have not been seen since before the [global financial crisis]," SSgA head of active Australian equities Olivia Engel said.

"Many of the issues prevailing over global investment markets in recent years remain, which signals the potential for additional short-term volatility spikes this year - including the unresolved eurozone debt crisis, the fiscal challenges associated with the US debt ceiling, and uncertainty over China's economic growth rate."

Last year, the Australian equities market valuation saw pockets of strong performance in defensive sectors, which showed valuations above long-term price-earnings (PE) averages.

Telcos were the best-performing sector, experiencing a 47 per cent return in 2012, followed by healthcare, which generated a 34 per cent return.

The equity market as a whole ended the year close to its long-term average at about 14 times forward earnings yield or 17 times trailing earnings.

The strongest-performing stocks were found in growth-orientated industries such as materials, discretionary and energy, however, they also showed a PE above the long-term average.

"Therefore, if one was concerned about the current valuation of the defensives given strong returns last year, the evidence suggests valuations are not too stretched - we could see these sectors trade higher relative to earnings," Engel said.