Economic Overview
The global economy and markets in the June quarter were marked by low volatility, growing confidence that growth is sustainable and less concern about scaling back of US quantitative easing.
The pace of growth, however, remained sluggish and the recovery patchy. The US led the expansion, but the Euro Zone’s emergence from recession is still slow as policymakers deal with low inflation and economic activity. In contrast to continental Europe, the UK economy gathered pace.
Across the Atlantic, the US Federal Reserve signalled it would soon end its monthly bond purchases. This would conclude a five-year program of quantitative easing with interest rates still near zero.
China’s economic growth showed signs of steadying around 7.4% in the second quarter, helped by more targeted measures compared to the previous years of rapid and unsustainable credit growth.
In Australia the focus continued to be on growth drivers to replace mining investment. While noting signs of a pick-up in consumer demand and construction, the Reserve Bank kept official cash rates at record lows while expressing discomfort at the continuing strong Australian dollar.
In contrast, the Reserve Bank of New Zealand raised its cash rate twice in the quarter. NZ’s economic momentum was fuelled by high farm commodity prices and earthquake reconstruction.
Market Overview
Asset Class Returns
The following outlines the returns across the various asset classes to the 30th June 2014.
While global economic recovery signs and continuing stimulus helped boost risk appetites in the June quarter, a significant feature in the quarter was the return to low volatility. Leading the turnaround was the US equity market amid signs the economic recovery there was on track.
Emerging markets bounced back after a tough year as fears eased over the consequences of QE tapering. While the US Fed continued to lower its bond purchases it gave no hint about interest rate rises.
The combination of ultra-low interest rates and rising risk appetites fuelled the search for yield, benefitting listed property, utilities and corporate bonds.
In developed markets, value beat growth in the quarter, while small caps lagged large. Helping large caps was a spike in merger and acquisition activity, with US deals up 56% in the first half of the year and European deals up 37%.
The search for yield was also evident in the Australian equity market, where the focus remained on the economy’s transition from the resources boom. Reflecting this theme, large mining companies were hit by falling iron ore prices.
Listed property was the best performing asset class in Australia during the June quarter. Value shares beat growth, but small caps continued to drag. The difference this quarter was the small cap weakness was focussed in industrials with small cap resource results benefiting from M&A activity.
As always there were no consistent patterns to be found amongst asset class returns. Listed property led the pack following on from its outperformance in quarter one. Emerging markets and global large, small and value shares posted positive returns after a negative first quarter.
This again highlights the futility looking for the next outperforming asset class, sector or individual share. Returns will fluctuate quarter to quarter as news emerges and is digested by the market. Investors have never been able to be ahead of this news, but they’ve always been able to diversify across all these asset classes. Diversification continues to offer the ability to lower portfolio volatility, while capturing market gains and minimising the impact of any losses.
It’s impossible to know which asset class will top this table at the end of quarter three.
One Too Many Financial Reviews
“For more than 50 years The Australian Financial Review has been the authority on business, finance and investment news in Australia.”
That’s how The Australian Financial Review describes itself – the paper of record for business, finance and investing. Yet on any given day you can flick through its pages and find investment headlines that are directly contradictory to those it gave you the day before.
The following are just a small sample of Australian Financial Review headlines from across the June quarter:
ASX Ignores US Woes As Major Miners Rally
Mayday: Investors Eye Bail-Out
If You Think The Sharemarket’s A Trifle Flighty, Think Again
Rate Rises Threaten To Spoil The Party
Accustomed To Bad News, Investors Struggle To Respond To The Good
Bull Run Has A Few Years To Go
Subdued Trading Has Analysts Worried About A Selloff
Bearish Traders Still Itch For A Fall
Bulls Enjoy Record Sense Of Confidence
Tougher Year Ahead For Shares
Get Ready To Sell Gold And Buy Stocks
Experts Divided On How To Spot Downturn
Stay Alert For Signs Of Trouble
Global Equity Trend Will Drive Up Valuations
Confused yet? Take our word for it, there’s one of these good/bad headlines in the AFR for every day it was printed in the June quarter. And for all this havoc and doom/boom that was being portrayed daily in the AFR, what was the end quarter result for Australian shares, measured by the ASX All Ords Accumulation Index?
A placid return of 0.47%.
With space to fill in a newspaper each day, reporters are always going to find ways to fill it. Despite the “experts” they quote, there certainly isn’t much legitimacy to their stories because they’re filler. Most are quickly forgotten and likely wrapping your fish and chips tomorrow.
They’ll continue filling their column space because they have to – just don’t let their confusing narratives fill your head.
Stable Markets & Acting Like a Turkey
In the midst of all the media flip-flops on where markets will go next, there has been one story that has gained some traction – the impending correction.
Because we’ve gone on for so long without too many large blips – as of July 1 the Australian bull market has been running for 753 days – the media is telling us we’re destined to have one. Though as you can see from the chart of Bull & Bear markets on the ASX since 1980 to December 2013, our current bull market is still mild and lately it has shown little volatility.
In reality though, it’s not the end of the bull market that is the danger. It’s the changing attitudes of investors when a bull or bear market is in full swing.
Recently the investment section of the Globe & Mail newspaper in Canada surveyed its readers to find out if they were concerned about a market correction. Only 14% of them said they were very anxious, while a third said they were confident things would roll on.
This highlights the increasing belief that risk is not a factor when things are continually good. Some of us have forgotten our most recent investment pain and begin to tell ourselves the share market will be stable like a term deposit while throwing off 15% gains each year.
Investors who are guided by the performance of the markets, instead of their risk profiles, will inevitably find themselves underestimating risk or overestimating it.
It’s here we’re reminded of the story of the turkey from Nassim Taleb’s book the Black Swan.
For the turkey on the farm, life is pretty good. Every day a kind man arrives like clockwork to feed him and it becomes a stable pattern. The turkey becomes comfortable with this routine and he has no reason to believe anything will change – this will go on forever. Then one day the kind man arrives without food, he’s carrying an axe instead and he’s not so kind anymore!
After all that stability, the turkey received a big surprise.
The investors who’ve let the bull market and its recent stability begin to guide their investment decisions are more likely to end up like our fabled turkey. They’ll underestimate risk and then one day things will suddenly change.
Not that we’re predicting any sudden change. This bull market could go on for another 1000 days or it could end tomorrow – only hindsight will be able to correctly show that outcome.
However, it’s a reminder to keep a disciplined approach to our finances.
Investment discipline isn’t a one way street. We’ve regularly pointed out it’s required when the markets are rough, but it’s equally required when markets are good.
Remember, risk is always there. It’s only our minds that make it disappear.
With thanks to DFA Australia.
This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.
