Australian Cash

The Reserve Bank of Australia (RBA) raised its official cash rate by 0.25% to 3.75% in December. An improving labour market, better prospects for business investment and increasing housing prices all prompted the increase.

The RBA has implemented three successive rate rises in the last quarter of 2009 as GDP growth in Asia, created firmer demand for Australian resources exports.  

Australian Fixed Interest

The UBSA Composite Bond All Maturities Index fell 0.4% in December, as yields on 10 year government bonds rose to 5.64% (up from 5.24% in November).

Credit markets returned 0.2% in December. Domestic corporate bond issuance reached $100 billion for the first time. The record issuance was largely due to extensive use of the government guarantee for financial companies, which accounted for 50% of total supply for 2009.

Global Fixed Interest

The Barclays Capital Global Aggregate index fell 0.6% in December. Yields on US 10 year government bonds rose to 3.84% (up from 3.20% in November). US Treasuries rose as the US government sold $US2.1 trillion of bonds in order to bolster the economy and financial markets.

Bond investors demand higher yields when they believe the economy will grow fast. Inflation often accompanies a surging economy – and inflation erodes the value of the bonds. The rising 10 year yields reflects the bond markets view that the US Federal Reserve will raise rates in 2010 to dampen inflation. Recent economic reports have shown that US GDP rose 2.2% in the third quarter of 2009.

As the graph in the next column shows, the difference in the yield between 2 year and 10 year government bonds steepened to a record in December as investors bet an accelerating recovery would fuel inflation and hurt demand during unprecedented government debt sales.

Australian Listed Property

The S&P/ASX 300 Property Accumulation Index was up 3.4% in December, slightly underperforming the S&P/ASX 200 by 0.3%.

Outperformance was seen from the Commercial and Industrial Real Estate Investment Trusts (REITs) as sentiment towards commercial property improved and risk appetite increased. Over the month and year, Industrial (9.3% in December, 12.4% in the calendar year 2009) was the best performing sector followed by Commercial (8.6% for the month). Diversified (2.3%) was the worst performing sector for the month.

The top performing trusts for December were Ardent Leisure Group (20.2%), Charter Hall Group (15.5%); and ING Industrial Fund (12.98%). Ardent Leisure Group was added to the S&P/ASX 200 index. Charter Hall Group benefited from an improved outlook and increased appetite for domestic real estate markets. ING Industrial Fund rebounded from a poor November performance when it was in the midst of a $700 million capital raising, and completed this in December.

Only one REIT registered negative performance in December. The worst performing trusts for December were Abacus Property Group (0.0%) and CFS Retail Property Trust (-0.3%).

Global Listed Property

The UBS Global Property Investors Index was up 5.7% in December. Japan (7.5%) and Singapore (7.3%) were the best performers. Continental Europe (2.9%) and Australia (3.4%) lagged.

In December, the Japanese Government unveiled its first long term blueprint to underpin the expansion of the world’s second largest economy.  The plan aims to secure average annual real GDP growth of approximately 2% over the next 10 years. It envisages the economy expanding 20% from JPY 500 trillion now to JPY 650 trillion by 2020. In addition, the Bank of Japan announced their intention to keep interest rates at close to zero and fight deflation. A weaker yen boosts the value of Japanese companies’ overseas sales when converted into their home currency. This has helped Japanese REITs trading overseas.

Major Japanese REIT, Tokyu, announced the disposal of two properties, netting capital gains from these transactions.
Over 2009, Singapore (84.2%) and Continental Europe (48.7%) were the best performers. Japan (-3.7%) and Australia (8.3%) were the worst performing regions. The chart below shows the performance of major regions (in local currency) over the month and year (to 31 December 2009):

Australian shares

The Australian market rally continued in December, with the S&P/ASX 300 Accumulation Index up 3.7%. The market was buoyed by mergers and acquisitions activity and some respite for companies with earnings in $US, as the $US strengthened. Performance was led by the Industrials (6.9%) and Information Technology (4.6%) sectors. For the year, the Information and Technology (54.8%) and Materials (47.7%) were the best performing sectors.

Several banks announced bad debt had peaked, helping to underpin the general recovery tone. Capital goods and services companies Downer, Leighton, Worley Parsons and Transfield all traded significantly higher. NAB (-4%) launched an all cash offer for AXA APH (13%), trumping a bid by AMP, and triggered speculation of further takeover activity in the wealth management and insurance sector.

The fall in the $A benefited QBE (15%), health care providers Resmed, Sonic and Cochlear, as well as other industrials like James Hardie, Amcor, News Corp and PaperlinX. Gold stocks were weaker. Qantas rose 15% on improved business outlook and Incitec Pivot rose 25% on improving fertiliser prices.

International shares

Global equity market continued their recovery in December, with the MSCI World ex Australia index (hedged, $A) up 4.0%. Performance was led by the Technology (6.8%), Consumer Discretionary (6.5%) and Utilities (5.2%) sectors. For the year, international shares rose 26.7%, led by Technology (50.1%) and Materials (46.8%).

In December, the US market advanced. Gains in the S&P 500 (1.8%) were hampered by large equity raisings announced by the Bank of America, Citigroup and Wells Fargo to repay bail-out funds. Exxon Mobil fell 9% despite the rising oil price, following its large takeover announcement for XTO energy. Better than expected retail sales, consumer sentiment, unemployment claims and housing starts saw talk of interest rate increases. 

European markets also gained (UK 4.2%, Germany 5.8 %,). Bank shares were hurt by credit rating concerns in Spain and Greece but benefited from speculation that new capital rules may be deferred. Hong Kong advanced (0.2%) and Japan soared (12.8%) as the $US rose against the yen.

Global emerging markets

Emerging markets rose in December with the MSCI EM index ($A) up 5.8%. Emerging markets closed 2009 with record annual inflows as the outlook improved for developing nation exporters. The IMF expects developing economies to expand 5.1% in 2010, compared with 1.3% growth in developed nations.

The IMF said that the unprecedented scale and scope of the measures taken by emerging market economies during the past year to manage the impacts of the GFC, as well as the degree of multilateral policy coordination involved in their design and implementation appear to have succeeded in averting a severe downturn in 2009.

In China, the purchasing managers’ index, a barometer of manufacturing, rose to the highest level since April 2004. China’s economy led the global recovery for 2009. The 2009 rally in shares boosted the price-to-book value ratio of the MSCI Asia Pacific Index to 1.62 times, the highest level since September 2008.

table 1 – investment market performance to 31 December 2009                                         

table 2 – breakdown of Australian & global fixed interest market performance to 31 December 2009

table 3 – performance of major Australia share market indices to 31 December 2009

table 4 – breakdown of Australian share market performance to 31 December 2009*

*Based on S&P/ASX 300 Accum Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).

top 5 performing Australian shares in December 2009*

bottom 5 performing Australian shares in December 2009*

*Based on the universe S&P/ASX 100 Index.

table 5 – breakdown of international share market performance by country to 31 December 2009

Note: all returns are calculated in local currencies

table 6 – breakdown of international shares market performance by sector to 31 December 2009*

*Based on MSCI world Indices (reclassified in accordance with the Global Industry Classification Standard “GICS”).
 
Note: all returns are calculated in local currencies

Economic indicators

This entry was posted on Friday, January 29th, 2010 at 2:04 pm and is filed under Economic Updates, Tax Updates . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.