Financial market update - January 2012

01/03/2012
Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

The year ahead is tipped to be a challenging one, but despite some obvious hurdles and a recent round of gloomy economic forecasts, there are grounds for cautious optimism in 2012.

The year has started on a positive note, with global share markets and real assets - property, infrastructure and commodities - all faring well. Central bankers around the world kept cash rates unchanged and the Australian dollar continued to climb against the US dollar, the Japanese Yen and the Euro.

On the not-so-positive side, official economic forecasts released recently by the World Bank and International Monetary Fund (IMF) provide a gloomier outlook than previously thought. The report presents a number of looming risks – notably that of Europe sliding deeper into recession.

On the one hand

IMF chief Christine Lagarde went so far as to warn of "a 1930s moment" - raising the specter of the Great Depression. The report lists a number of less dramatic scenarios, from a return to 2008-09 conditions to a "small contained crisis" leading to slower than expected growth.

It is important to note that the levels of market volatility experienced since mid-2011, while high, have not reached anything like those experienced during the Global Financial Crisis of 2008.

There are however, genuine challenges in the year ahead.

Graeme Mather, head of Investment Consulting in Australia / New Zealand for Mercer, said a troubled Europe continued to pose a very real threat to global economic prospects.

"It looks set to be a year in which significant parts of the world struggle to achieve decent economic growth," Mr Mather said.

"The threat of further shocks to the financial system will be top of investors' minds."

But on the upside...

Mr Mather said that an improving US economy and the continued strength of emerging market economies could yet lead to respectable global growth.

So far that has proved to be the case. It's been a good start to the year on world markets with shares rallying on the back of positive US and Chinese economic data.

Even European shares are higher following recent moves by the European Central Bank to help support European bank liquidity.

Market update - January 2012

A typical growth portfolio was up over 3% for the month of January. Here's a summary of the performance of the major asset classes over the month.

Australian shares

Share markets rallied in January as investors' risk appetite returned. The Australian share market fared well, in response to positive Chinese manufacturing data which helped to allay concerns of a possible "hard landing" for China.

The ASX 300 Accumulation Index finished the month +5.1%, with Resources stocks enjoying a healthy rebound (+10.8%). Cyclical sectors were the strongest performing sectors over the month - Materials (+10.3%), Energy (+8.4%) and Industrials (+6.3%).

Both the IT (-3.0%) and Healthcare (-1.0%) sectors lagged the broader market return for January. Domestic small companies also clawed back returns over the month (+7.8%) fuelled by a rebound in the Resources sector.

Overseas shares

January was a strong month for overseas shares (+4.9% in US$), which translated to 1.2% return in unhedged Australian dollar (A$) terms as a result of a 3.7% rise in the local currency.

Real assets

It was a good month for Real Assets with property, infrastructure and commodities all faring well.

Global listed property returned 6.1%, and global listed infrastructure returned a more modest 0.8% in A$ hedged terms. Broad Commodities also posted a solid performance (+2.8% in A$), while Agricultural Commodities returns were flat (in US$).

Fixed interest

Central bankers around the world kept cash rates unchanged. With the Board of the Reserve Bank of Australia (RBA) adjourned for holidays in January, the Australian cash rate remained unchanged at 4.25%.

Sovereign bonds continued to post positive returns as falls in bond yields moderated. Ten-year bond yields fell, but only modestly, as investors continued to seek out sovereign debt - US (-8bps to 1.80%), Germany (-3bps to 1.75%) and UK (-1bps to 1.97%).

The Australian 10–year yield rose (+5 bps to 3.72%), while in Japan it remained unchanged (0.96%). Both Australian sovereign bonds – up +0.1% - and global sovereign bonds - up +1.0% in $A hedged) - posted positive returns for the month. Global credit (+2.6% in hedged A$) and both domestic and global inflation-linked bonds (+1.2% and +2.1% respectively) also fared well.

Currency

The Australian dollar continued to climb, as it ended the month at US$1.0628, a 3.7% appreciation. The A$ also appreciated relative to the Japanese Yen (+2.7% to ¥81.0) and relative to the Euro (+2.8% to €0.81).

 

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