Market Commentaryby Chris Limberg on Jun 15, 2012
The ASX 200 closed the financial year at 4094.60 which was down -5.55% for the quarter and -11.14% for the year. Throughout this quarter there has been continued volatility due to overseas influence from the USA and European countries. The news flow from Greece and Spain remains negative, the world is waiting for news on a decisive course of action to begin to solve the Euro zone issues.
- The performance of Australian companies is mixed with resources companies being sold off heavily.
- Several profit warnings were made most notably from Iluka (ILU), with the share price being sold down from plus $18 to below $9 during the quarter.
- The RBA reduced interest rates throughout the quarter twice. May saw a -0.50% rate cut and June saw an additional -0.25% cut. The RBA cash rate at the end of quarter at 3.50% which is good news for mortgage holders. The RBA interest cuts have put pressure on cash accounts and term deposit rates.
- With reducing interest rates on cash there has been increasing demand from investors for investments that can provide higher income than the declining cash rate and term deposits available.
- The focus shifted from growth stocks too companies that can provide sustainable dividend income.
- The increase of debt issuance from top 50 companies has provided the opportunity for an attractive interest yield and to lower the volatility of portfolios.
- Further interest rate cuts are predicted in Australia by leading economists. Australia is fortunate to be in a position to cut rates considering the US where the rate is 0.25% and will remain this way until at least 2014. The Japanese rates are near 0%, and the Euro zone at 1%. The RBA has room to move should the global economy worsen.
- Spain and Greece remain the focus point, as rumours circulate that Greece may be forced to leave the European Union.
- Bond rates in Spain continue to increase and recently reached 7.62% and Italian bonds reaching 6.5%. This is cause for concern as increasing interest exacerbates debt levels.
- Spanish unemployment continues to increase.
- Northern European countries, such as Germany remain strong, will need to provide support to Europe and struggling Portugal, Italy, Ireland and Spain.
- Bond rates in Netherlands and Germany are at levels not seen in over 500 years.
- Chinese growth has slowed to around 7% causing a slowdown in construction and a tightening of money supply which is in line with the latest Chinese 5 year plan.
- China consumes vast quantities of Australian commodities, and continues to develop its infrastructure and build cities for its increasing middle class population.
- The market expresses concern in relation to China’s consumption of steel making inputs, however the latest 5 year plan dictates increasing steel production during the course of the this plan.
- US GDP forecast has been downgraded to 1.9% - 2.4% down from earlier forecast of 2.4 – 2.9%.
- US unemployment has been forecast at 8 – 8.2% while the previous forecast was 7.8 – 8%.
- US corporate profit reporting has begun and it would appear that the profit results will be better than forecast.
- US 10 year bond rate is the lowest in 200 years.
Should you have any queries or want to discuss the above or your portfolios please do not hesitate to contact us.