Market Update April 2014

The Australian dollar had its strongest month since September last year, up against a weaker pound, yen and RMB and with less of a gain against the Euro and rising to 93c against the US Dollar, after the RBA signalled it has moved to a neutral stance on interest rates. However, it is still significantly over valued on fundamentals and so provides further prospects for those not yet invested in international shares, especially non-US, to take the opportunity to top up.

Australian shares

Australian shares were flat in March, gaining around 0.2% for the month and 1.99% for the quarter, following February’s recovery from January’s fall, supported by reasonable domestic economic data and signs of improvement in earnings, taking year on year returns for the ASX300 to 12.97%.IMR_2014-04-5 - Australian Equities

Shares for banks and insurers were up, but most other major shares were weaker. Materials fell 3.1% on growing concerns about the Chinese economy and downward pressure on commodity prices.

With the All Ordinaries level index around the 5400 level the Australian market is at the low end of ‘fair value’ (with expected 10-year returns around 9.7%pa) at that level on a ten-year view.

The Small Cap accumulation index fell 1.2% in March after the February rise, taking year on year returns to -1.46%. The small and mid-cap areas are where better growth prospects are still expected by numerous value-based fund managers.

International shares

International shares also had a flat month in March following the February recovery of January’s losses, with 0.18% rise in local currency but a 3.4% fall in Australian Dollar terms.IMR_2014-04-7 - International Equities

The US market has now experienced a relatively smooth 70% rise since the credit downgrade crisis in September 2011, with some hiccups along the way around including the Fed’s tapering and Russia’s invasion and annexation of Crimea in the past month.

The world ex-Australia is now up around 35% over the last year in Australian dollars, but 19% in local currency, with the difference due to the depreciation of our currency against the US dollar and UK pound.

Emerging Markets were also mostly flat in March, but outperformed developed market shares by 1.7% in local currency to represent the third time emerging markets have beaten developed markets in the last year, with especially strong gains by Latin America. While expected returns are above the long-term average at these levels investors can expect high volatility as many markets are difficult to value due to a reliance on fickle global sentiment.

Listed Property and Infrastructure

The Australian listed property trusts were mostly down in March after a strong February, with the index down 1.6% for March, but up 3.2% for the quarter comparing favourably to shares only up around 2%.

Signs of improvement are the result from steadying bond yields, reducing the outflow from interest rate sensitive sectors to shares, and an improving economy, especially in the retail sector, which is supporting the earnings outlook and valuations. It probably makes sense slightly reducing the underweight allocation to this sector. Yields are attractive compared to ban k deposits and most trusts are increasing cash distributions. However, the underlying commercial property market fundamentals are still weakening.IMR_2014-04-9 - Australia REITs

Residential property has continued to pick up, especially in Sydney that has been playing catch up after years of suppressed demand, but enthusiasm of buyers is being dampened by talk of an end to interest rate cuts and even the prospect of a rates increase in the coming year. On the supply side, there is a glut of units in several segments of the market – with constructions and completions increasing, vacancy rates rising and rents falling. This is especially concentrated in markets targeted at SMSGF investors and foreigners.

Fixed interest and Cash

The RBA held cash rates at 2.5% again in April as expected to remain at that level for the rest of the year.

Bonds were steady in general with US 10 year bonds at 2.7% and Australian 10-year bonds between 3.9% and 4.2%, with reduced volatility now the RBA is moving to a neutral interest rate position.IMR_2014-04-8 - Australian Investment Grade FI

Australian fixed interest overall returned 1.45% for the quarter, outperforming cash returns of 0.6%, and the UBS composite bond index, covering both government and corporate bonds in Australia, was flat (0.02%) in March after a marginal rise of 0.34% in February.

For more specific help and guidance with your own investment strategy or asset selection, please don’t hesitate to contact Michael Rees-Evans CFP® in our office on 02 9299 7044 or by email at michael.rees-evans@lockwood.com.au

Important note: this information is based on opinions and information obtained from various sources deemed reliable, especially farrelly’s, Philo Market Monitor and van Eyk Research, with graphs sourced from Bloomberg and van Eyk. However, it is of a general nature and has been prepared without taking account of anyone’s financial situation, objectives or needs. Before making any investment decisions based on the contents you should obtain professional advice.

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