Economy & Markets: Overview
The benefits of global diversification were never more evident than in 2013. The major developed world markets, which had been near the centre of investor concerns in recent years, led the world with strong gains.
Economic recovery hopes made the US, Japan and Europe the year’s star share markets, while expectations of reduced US stimulus hit emerging markets. Australia fell somewhere in between. The US S&P-500 had its best year since the 90’s, as it reached record highs with a return of 32.39% in US dollar terms. And despite US Government debt ceiling brinkmanship, daily volatility fell to a seven year low.
In Japan, the Nikkei rose 57% in local currency terms to post its strongest performance since 1972. In Europe, the centre of much concern in recent years, showed share market strength across the board. Germany and France led the charge, while even Greece posted double figure gains.
While weaker commodity prices hurt Australian shares, this was offset by gains in banks and consumer staples. This helped push the S&P/ASX 300 Accumulation Index nearly 20% higher. The Australian dollar fell against the US dollar as the mining boom faded and the Reserve Bank continued to cut the local cash rate.
The above chart tracks the performance of the Australian share market over 2013 against some of the major news events of the year. These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily news events from a longer-term perspective, and avoid making investment decisions based solely on the news.
Themes of 2013
Improving US Economy and Fed Stimulus Questions
The US economy improved again in 2013 with estimated GDP growth averaging 2.3%, up from 2.0% in the previous two years. Positive signs included job gains, rising wages, a revival in manufacturing, stronger auto sales, improved corporate balance sheets and sustained business profits.
With interest rates remaining at historic lows, attention focussed on when the US Federal Reserve would taper its quantitative easing program. After varying signals throughout the year, the Fed confirmed in December that it would move cautiously in unwinding the stimulus, initially cutting its monthly asset purchases by $10 billion.
Australian & New Zealand Moving in Different Directions
In 2013 the end of the commodities and mining boom raised questions about whether our long period of rising prosperity was coming to an end. As metals prices eased and mining investment plateaued in Australia, New Zealand was buoyed by strong Chinese demand for dairy products and stimulus from the rebuild of Christchurch following the earthquake.
The fortunes of both countries were markedly different. The RBA cut Australia’s cash rate to 2.5%, on par with New Zealand, and while Australia’s incoming government flagged a $47 billion budget deficit, New Zealand was projecting an improving budget surplus.
These varying fortunes were reflected in the currency, as the Australian dollar fell to five-year lows against the Kiwi dollar.
Slight Relief in Europe
Growth finally returned to the Euro area after an 18 month recession. Borrowing rates in the worst hit countries declined, consumer and business sentiment improved and foreign investment recovered. Regardless, unemployment remained historically high at around 12% for the Eurozone.
In November the European Central Bank surprised markets by cutting interest rates to record lows to stop the recovery from stalling.
‘Abenomics’ moves Japan
Japan was a standout in 2013, helped by the unprecedented stimulus of Prime Minister Shinzo Abe, who pledged to rid Japan of the deflation that has plagued it for 15 years. Known as ‘Abenomics’, it came in the form of aggressive monetary easing, large scale public investment and structural reform.
While Chinese economic growth slowed in 2013, indications were it would come in above the government’s forecast of 7.5%. China is now aiming to restructure its economy to be driven more by consumption and services than exports and investment.
2013 Investment Overview
For all the uncertainties in 2013 over the future of Federal Reserve policy and the sustainability of growth in emerging economies, equity markets still delivered solid performances across the board.
Developed markets led the way, with a gain in Australian dollar terms of 48% as measured by the MSCI World-ex Australia Index. This was aided by the 14% decline in the $A, something that added value for unhedged investors.
With our exposure to commodities, Australia lagged major developed markets, but still managed an almost 20% return. While small caps beat large in developed and emerging markets, Australia was the notable exception as smaller mining companies were routed. Banks were a major contributor to overall market performance, providing the bulk of gains.
It’s again worth looking back over the past ten calendar years on the Australian share market. As daily gyrations and monthly corrections still have the media referencing the market in dark terms, you’d be excused for thinking it was forever red. Not so. Eight out of the last ten years have been positive and seven of those years produced double digit returns.
The economic recovery and expectations of reduced stimulus hurt fixed income indexes. Longer-term bonds underperformed shorter-term, although economic recovery signs increased credit risk appetites. The Barclays Global Aggregate Index, hedged to the $A, returned 2.27% for 2013.
Real estate securities had a relatively lacklustre year after the big gains of 2012, but the sharp fall in the $A helped unhedged investors in global REITs.
Summary
The past year was an extremely solid one in global equity markets, with many of the factors that had worried investors in previous years becoming less concerning. The modest recovery continued in the US, while Europe finally emerged from the shadows. There were plenty of headlines and short-term distraction, but 2013 reminded us of the benefits of discipline and seeing past the daily headlines towards the long-term opportunities for building wealth.
The Australian’s Top 100 Ways to Lose Money
With the year concluded many forecasters and dart throwers in the investment world looked to the year ahead. They were out quickly with their predictions, trying to convince us of the economic trends likely to occur and the companies likely to dominate the share market in 2014.
We, on the other hand, were looking backwards. At what they all hoped we’d forget – their predictions for 2013.
The Australian newspaper produced a list of their “Top 100 Picks for 2013”. The list comprised 66 share picks and various other financial products “gathered from industry experts” and their own contributors. The list was no doubt meant to lead investors to the promised land of wealth in 2013, but if we focus on their share predictions, it’s more likely anyone following The Australian’s lead ended 2013 with the backside out of their trousers.
Of The Australian’s 66 “top share picks” there were 31 winners and 35 losers. The average gain on the winners was 30% and the average loss on the losers was -43%. The average return from all picks combined was -8.86%.
A staggeringly bad result when the ASX 300 was up 19.68% which meant this collected wisdom from The Australian’s “industry experts” underperformed the market by over 28%.
The scary thing, despite this resolute failure, The Australian is at it again in 2014!
Hopefully this underlines the value of taking investment advice from the media.
Source http://www.idiottax.net/2014/01/the-australians-top-100-picks.html
With thanks to DFA Australia.
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