| Kreston Dormers Financial Services Pty Ltd |
Please find below and attached our 'Weekly Market Update'.
We are continuing to get feedback and suggestions for improvement on the report, so if you have any suggestions please let us know
If you would like to discuss this email in more detail, please contact your financial adviser, Mark Johnson or Nick Pike on 1800 064 959.
Market Summary
The ASX 200 was -2.0% weaker due to falls in commodity prices. In contrast to last week Materials and Energy were the key reason for the falls down -3.9% and -3.7% respectively.
|
| |
Friday |
Week |
% |
| All Ordinaries |
4,653 |
-95 |
-2.0 |
| S&P / ASX 200 |
4,639 |
-93 |
-2.0 |
| Property Index |
851 |
-4 |
-0.5 |
| Utilities Index |
4,115 |
-80 |
-1.9 |
| Financials Index |
4,605 |
-51 |
-1.1 |
| Materials Index |
11,988 |
-481 |
-3.9 |
| Energy Index |
15,362 |
-588 |
-3.7 |
 |
|
Overseas, the US S&P 500 rose 0.3% while the UK’s FTSE was -1.3% weaker. In Asia saw the Nikkei was down -0.7% after last week’s 8.0% rise. Hong Kong’s Hang Seng fell 3.8%.
In Australia, BHP and Rio signed off their joint iron ore venture and we picked up some evidence of the carry trade unwinding. Unemployment fell in both Australia and the US although this news was negated by Greece’s credit rating downgrade to BBB+. In the feature section we explain the reason the Australian market has recently underperformed the US market and review the history of share markets performance in January.
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Overseas News
News from overseas was mixed.
On Friday night our time, the US Bureau of Labour Statistics announced that during November unemployment fell from 10.2% to 10%. The fall was unexpected and is a strong positive indicator for the economy as a drag from unemployment is a key risk to the US recovery.
Ben Bernanke, the Chairman of the US Federal Reserve stated that the US would continue to experience ‘formidable headwinds’ including tight credit and weak labour markets which would ‘keep the pace of expansion moderate’. As he made the statement after the unemployment numbers you would tend to think he is discouraging any ‘irrational exuberance’ taking hold in the share markets.
To explain further, there has been considerable debate about whether the Fed should take into account asset prices (e.g. shares) when formulating policy. For example some are arguing that unsustainable sub-prime house prices should have driven Fed policy in 2005/06. My view is that Bernanke has now decided he should take into account asset prices and he is attempting to dampen down the possibility of unsustainable rises in the share market.
Global markets were weaker this week on the back of a downgrading of Greece’s credit rating to BBB+ by ratings agency Fitch. Additionally, Standard & Poors has Greece’s credit rating on negative watch due to a budget deficit of 12.7% of GDP. European banks were sold off heavily on this news and this flowed through to our banks on Wednesday. Standard and Poors also downgraded Spain from AAA to AA+.
Japan released a 7.2 trillion yen ($US81 billion) stimulatory package focussed on public works projects and environment related programs. The Japanese economy has been struggling to gain traction as it is heavily reliant on exports. While trade has been increasing it is at still considerably below what would be regarded as ‘normal’.
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Australian News
BHP and Rio signed binding agreements for the proposed Pilbara Iron Ore Joint Venture which covers production and distribution for the Pilbara assets. The agreement does not cover the marketing of iron ore from the joint venture and BHP and Rio estimate that they will save more than $US10 billion by combining each company’s operations.
The venture still has to be passed by the European Community and Australia’s ACCC.
Our Research Department noted that over $5 billion of shares were sold last Friday and Monday by an overseas fund manager. We surmised that the expectation of an impending $USD rise after better than expected US unemployment numbers was the catalyst for the selling – perhaps a bit of an unwinding of the carry trade we discussed in a recent Weekly Update.
The reason for this would be that the improved unemployment numbers means the US Federal Reserve is more likely to raise interest rates which in turn will attract money back to the $USD from investments in other countries (e.g. Australian share market). Below we surmise that this may be the reason for the recent weakness in our markets.
Related to that point was the fall in the gold price last Friday night and this week from over $US1,200 per ounce to $US1,127 ounce. We discussed the potential for this in last week’s update. On the back of an expected US interest rates rise due to falling unemployment, the $US strengthened this week as money moved from gold back to $US.
Australian unemployment fell from 5.8% to 5.7% in November with almost all of the 31,200 jobs added being full time. This was the second month in a row that unemployment has fallen and is a faster rebound than expected.
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The recovery: So far so good but what happens next
As we will be sending only a brief Weekly Update next week due to Christmas, we thought it appropriate to review the recovery so far and look at the history of the markets over the New Year period.
The recovery so far?
In the table below we set out the extent of the recovery on the markets we track.
|
| Market |
Rise from March 2009 lows |
| Australia ASX200 |
47.3% |
| US S&P 500 |
60.6% |
| China Hang Seng |
80.4% |
| Japan Nikkei |
37.3% |
| UK FTSE 100 |
47.4% |
|
|
China’s Hang Seng has outperformed all markets with an 80%+ gain. This is a result of China’s economy growing between 8% and 9% p.a. The economy only slowed to 6% during the height of the downturn early this year and the government stimulus has meant growth has rapidly increased since that time.
Japan on the other hand is languishing with only a 37.4% rise since its lows as it grapples with deflation and an economy that has responded poorly to government stimuli. Japan’s problem is that it is heavily export focussed and trade is still at low levels.
The more puzzling numbers are between the US, UK and Australia. Australia’s ASX 200 has risen less that the UK’s FTSE despite the UK economy being in very poor shape. Also bear in mind that the ASX 200 had larger falls than the FTSE from its peaks.
The ASX 200 has risen 13.3% less than the S&P 500 over that period despite similar falls from their respective peaks (the ASX 200 fell 54.1% and the S&P 500 56.4%from November 2007 peaks to the lows of March 2009).
From an underlying economic perspective, this does not make a lot of sense given the comparative states of the US (which is struggling to emerge from recession), the UK (which is still very weak) and the Australian economy (which is starting to show reasonable growth).
We can only surmise the reason for these differences may be at least partly related to the carry trade and end of year selling :
• There is an expectation that the flight to non-US denominated assets (the carry trade) will unwind as the US pushes up interest rates and money flows from Australia back to the US. There is some evidence for this (refer comment on selling by fund managers above). If you were an overseas investor and you had made 50% on a share market gain plus another 50% on the currency ($AUD vs $US) there would be considerable temptation to sell your investment and repatriate profits back to the US/$USD.
• Other evidence is the recent fall in commodity prices (e.g. oil is down 7% this week to $US70.54) although this fall also relates to higher inventories.
• Goldman Sachs estimate there are $25 billion in $US short positions in place which means investors will at some time need to buy $US with $AUD to unwind those positions.
• This ‘temptation’ would be even greater if you were a fund manager (and particularly in the US) just about to be assessed on your bonus for the year and you wanted to lock in your bonus prior to going on leave.
If this is the reason, then while this potential for a flow of money to the $US is in place, our markets will remain under pressure. However once the potential or actual flows abate you would expect the Australian markets to move to levels more consistent with the US rises.
However, my view is that the above probably only explains part of the differential although almost certainly the reason for the very recent outperformance of the US/UK and Australian markets.
The reason for the rest of the difference in market rises ? That is a question I will take on notice.
Are December and January good months for the share market ?
Generally November to February are strong months and the November just passed was no exception. However in December to date we are almost 100 points or 2% down at the time of writing so we have some ground to cover if we are to finish with a positive month.
Below, we review share price movements on the US S&P 500 for December and January from 1950 to 2008 (source : www.moneychimp.com). The data below is for the US but generally our markets follow the US
Generally December and January are positive months :
• December has been positive in 44 years and negative in 15 years with an average positive return of 1.57%.
• January has had 36 up years and 23 down years with an average positive return of 1.12%.
This positive trend is even more marked for the January and December after a bear market ends :
• For the first January and December after a bear market since 1960 :
o Januarys have been positive without exception
o Decembers have been mostly positive although more of these Decembers fell early in a recovery phase thus you would expect these more likely to be positive
|
| Year : first December after a bear market |
December
% Rise in US S&P 500 |
Year : first January after a bear market |
January % Rise in US S&P 500 |
| 1960 |
-0.32 |
1961 |
7.31 |
| 1965 |
0.9 |
1966 |
0.49 |
| 1972 |
8.62 |
1973 |
1.81 |
| 1974 |
-1.78 |
1975 |
11.8 |
| 1982 |
1.5 |
1983 |
3.31 |
| 1987 |
7.28 |
1988 |
4.03 |
| 1991 |
11.19 |
1992 |
4.16 |
| 1995 |
1.74 |
1996 |
3.2 |
| 2003 |
5.08 |
2004 |
1.73 |
| 2009 |
? |
2010 |
? |
|
|
• Of course there have been bad Januarys and Decembers and January 2009 was one example.
• The rationale put forward for positive Januarys is that fund managers have finished selling portfolios to lock in year end profits thus the selling pressure eases. Also as fund managers return from leave in January, they start to build positions (portfolios) with a view to profits over the following year.
• It is impossible to tell whether this is the actual reason and whether this will reoccur. We can however say that there is a recurring positive trend in December and particularly in January.
Conclusion
The recovery to date has been strong when we compare where the depths of March this year. The size of the recovery is not unprecedented as we experienced similar rises after other severe bear markets.
Recoveries are not smooth and there are negative as well as positive months and monthly rises and falls can at times exceed 10%.
In conclusion we seem to be heading for a negative December but history points to a positive January.
The reason for the different rises in share markets between Australia and the UK/US at least partly relates to the potential to unwind the carry trade. We will need to get back to you on the reasons for the rest of the differences. |