Market Commentary

by Chris Limberg on Dec 15, 2014

The Australian Sharemarket was extremely volatile during the December quarter, resembling a rusty old saw blade. The S&P ASX200 increased marginally over the quarter to close at 5,411.

Australia

  • The Reserve Bank of Australia (RBA) kept the cash rate at 2.50% pa for the quarter maintaining a “period of stability in interest rates”
  • The labour market remains soft with low wages growth which will weigh on consumer confidence and spending
  • Consistently low interest rates have supported housing market activity
  • The Australian dollar continued to slide 6 cents to $0.81 USDs however the RBA wants the AUD to depreciate more, to assist in achieving balanced growth across the Australian economy
  • The inflation rate remains within the RBA target range of 2-3%

US

  • The US S&P 500 and Dow Jones Industrial Average finished the period stronger
  • The US economy continues to improve month by month
  • The FED completed the quantitative easing (money printing) stimulus program.
    • Analysts are now attempting to predict the timing of the first interest rate raise

Europe

  • European economy continues to deteriorate with deflation becoming the headline concern
  • EU central bank president Mario Draghi hand is likely to be forced with the conversation shifting from “if” to “how” the European Central Bank (ECB) will conduct a quantitative easing programme to prevent deflation
    • Deflation is a problem that generates a downward spiral with key trends as follows:
      • With falling prices people are incentivised to hold onto their money because “tomorrow” more goods and services can be purchased with the same amount of money
      • Less buying of goods and services, leads to greater price falls, that leads to lower business revenues, which results in a wage trap resulting in outcomes such as increasing unemployment and lack of competitiveness
      • Higher unemployment decreases tax revenues increasing Government debt burden
      • People are less willing to borrow because debt will become more expensive as money becomes more valuable – not to mention the copious amounts of existing debt
  • Greece has a general election on January 25th. Should the left-wing Syriza party lead by Alexis Tsipras win Greece will again be creating political turmoil particularly with Germany
  • The Ukraine/Russian dispute continues   

China & Japan

  • Growth of the Chinese economy continues to slow while Chinese controllers attempt to redistribute economic expansion
  • Japan Prime Minister Shinzo Abe accelerated the money printing presses in an effort to stimulate the economy and create inflation

Australian Initial Public Offing (IPO)

2014 was a record year for IPO’s on the ASX. The particularly sought after sectors were aged care, technology, health and financial services. Most of the listings in these market sectors were significantly over subscribed indicating there is plenty of money available for sound investing opportunities. 2015 looks to be a cautious time for investors with regard to new IPO’s as the companies scramble to list credentials will be scrutinised carefully to justify valuations.

The Year Ahead

2015 we are awaiting signs of catalysts to drive sharemarkets to higher levels:

  • Increasing business confidence and profits
  • Increasing RBA support for Australian market transition away from mining
  • Strengthening US growth proving stimulating actions are no longer required
  • A stronger US dollar
  • Stabilisation in the Chinese economy
  • Liquidity support from both Japan and the Europe

Scrutinise for events that may disturb sharemarkets such as:

  • Lower US growth and interest rate movements
  • RBA intransigence on rates
  • A resilient Australian dollar
  • Intensifying conflict
  • World political elections
  • Geopolitical terrorist activity in the Middle East and Ukraine 
  • Fracturing concerns of the European Union on Continental Europe

Should you have any queries or want to discuss the above or your portfolios please do not hesitate to contact us.