It has been another interesting month in the global markets, this month with the impact of the events in the Middle East my inbox has been filled with many views from economist and analysts about where the economy may be heading.
We have seen the announcement of BHP to buy back shares which will reduce the equity they have on issue and should increase their share price in the market but for those effected clients I will be in touch to discuss the impact on your personal situation.
The month that was.
The Australian equity market (ASX 300 Accumulation Index) returned +2.3% in February. The Australian profit-reporting season has been the key focus for investors during February. The relative performance of the Resource sector (+3.7%) and rest of the market excluding Resources (+1.7%) highlights the two-speeds involved in this year’s reporting season.
The Australian equity market demonstrated a greater connection to global Developed Market returns in February, with the US (S&P500 +3.2%), UK (FTSE100 +2.3%), Germany (+2.8%) and France (+2.6%) uniformly positive.
Other events that effected markets was the political unrest that rolled through the Middle East in February. As a result oil prices rose +7.1% (West Texas Intermediate (WTI) Spot price) that led the Energy sector (+3.1%) to outperform the market during February.
Interest Rates
The Reserve Bank of Australia left February cash rates (4.75%) on hold as non-resource trading and outlook remain subdued. December retail sales were flat during a traditionally strong trading period. Key discretionary retail stocks, Myer and David Jones, issued profit downgrades in February as weak sales conditions continued through January.
International Impacts
The US earnings season was very strong with 45% earnings growth shared across an encouraging broad spectrum of sectors in a market that is still showing signs of value with a Price Earning Ratio at 11 times. The US should continue to be supported by a cheap currency, productivity growth and research & development which excluding resources is in stark contrast to what we are seeing in Australia at the moment.
In China, concerns over inflation can be over inflated! The point was made that it is easy to get caught up in comparisons to first world inflation. An inflation level of 5% in China is ok when they are pushing growth rates of 10%.
The comparison of this is that Australia is only growing at 3% yet 2-3% inflation is acceptable. So it is important to take into account growth levels at the same time as looking at inflation.
From a sector perspective resources should continue to be strong and withstand cost increases this year, banking growth will not be huge but still in the low double digits including dividends, while industrials should be flat domestically due to cost issues, low consumer spending and more taxes (flood, carbon, no health offset) but ok for those with offshore exposure.
Listed property is now in much better shape however with growth levels of only around 2% there could be better opportunities elsewhere still.
A Manufacturing boom!
Global manufacturing has hit its highest level since 2004 – a level consistent with a manufacturing boom. There are, however, two important differences since then. In 2004 the Federal Reserve in the US tightened monetary policy. This is not going to happen in 2011 and so it is more likely that the boom will be sustained which is probably what the US Economy needs at the moment. Just as important is the strength in developed economies. This is not a boom solely based on a runaway Chinese economy and the rebalancing global economy is another factor that will help sustain the boom.
Oil price Concerns.
Political uncertainty has pushed up oil prices to the highest levels since 2008 with fears of more to come. However context is crucially important when evaluating the likely economic impact of higher oil prices. Obvious factors include economic growth and central bank policy bias. There are also less obvious factors and their complexity should be a warning about rushing to judgment regarding the effects of oil prices.
The interaction of terms of trade and exchange rates is one of these complexities that need to be considered. It is one reason why the blow to the US economy, from the higher oil price may be quite modest. If the oil price rise accelerates global rebalancing then this would strengthen the US position even further. The income that is redistributed towards the oil exporters in the Middle East is more likely to be transmitted to US producers than either Asia or Europe. It is undeniable that the US would still suffer some weakness because of deterioration in its own terms of trade. But the boost to American export competitiveness, its position as a massive food exporter and its security importance for the Middle East implies that the US will actually be a relative winner in any adjustment.
My Opinion:
It is my view we are still going to see some volatility in the markets from the yet to be known events like those happening in the middle east so it is still important to have a well balance portfolio position by making investment in a considered and structured way to ensure that it is aligned to your overall goals and outcomes for life!
Scott Malcolm (scott@money-mechanics.com.au) is Director of Money Mechanics (ph: 6257 5557) a fee for service advice firm who are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.
The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.