Outlook for Investment Markets December 2009
The economic outlook has continued to improve both domestically and internationally, and the global financial crisis has continued to ease. While markets have reflected these positive developments, investors across a range of asset classes seem to have gone into 'wait and see' mode about what 2010 will bring. Markets may remain in the same state of mind until more data is to hand confirming the reality of potentially better times ahead.
LISTED PROPERTY
Review
The Australian listed property sector has behaved recently much like the wider sharemarket, with a good gain for the quarter as a whole but some easing back over the past month. The S&P/ASX200 A-REIT Accumulation Index was up 11.10 percent over the past three months, but has dropped 3.30 percent over the past month. There has been some corporate activity, notably the A$700.0 million of equity raised by ING Industrial and Mirvac's A$256.0 million bid to take over its associate Mirvac Real Estate. Global property shares had a relatively subdued quarter for once. The EPRA/NAREIT Global ex-Australia Index hedged back into $A was up 9.10 percent, although (like overseas shares more generally) the bulk of the rise was early in the quarter, and prices have drifted back a little over the past month. This levelling out in recent weeks suggests that the rollercoaster ride of the past two years is settling down: to give some flavour of the extreme volatility involved, a dollar invested in the index two years ago had dropped to 35 cents at the low point (March 2009), and has doubled since then to 70 cents.
Outlook
The domestic listed property sector has been focusing on balance sheet strengthening by locking in loan facilities and raising new equity. The economic environment at home and overseas has also been improving. Even Centro, whose refinancing problems started the rout in late 2007, feels that the worst is past, its chief executive recently noting "a stabilising retail environment in the US, with consumers starting to emerge and tenants, for the first time, considering expansion". Investors also seem more convinced about the outlook for the sector, as it is trading at only a slight discount to net tangible assets, suggesting that investors are not too worried about further asset devaluations in the pipeline. Whether yields around the 6.50 percent mark will be enough to support the sector remains to be seen, however: while beating Commonwealth bond yields, at current levels AREIT yields trail the returns from corporate debt. The good news for the global property sector is that an easing of the credit crisis and an improving global economic outlook have justified rises in property shares from their distressed levels of earlier this year. The tougher news is that there's still a lot of work to do to restructure balance sheets, and some sectors have substantial workouts ahead of them. US commercial property is one example. Morgan Stanley has just handed the keys to its Crescent portfolio of offices and resorts (which had cost the firm $US6.50 billion at the top of the market in 2007) back to the bank which had lent $US2.0 billion to help pay for them. And in Japan, where economy-wide deflation is leading to falling rents and property values, the EPRA/AREIT index of Japanese property shares fell 16.0 percent over the past quarter. Global property will continue to be a market where specifics of companies, sectors, and economies will be paramount.
AUSTRALIAN SHARES
Review
Australian shares have had a good quarter, although virtually all the gain came in the first two months. The S&P/ASX200 Accumulation Index peaked on 15 October at 4860, and at the time of writing was 2.30 percent off its peak, at 4749. The index was up 8.60 percent over the past quarter but down marginally (-0.90 percent) over the month. There was little to choose between the market subsectors: the Industrials, Resources, and Financials show the same pattern of a strong rise into the first half of October and a modest drift backwards since.
Outlook
The rise in share prices for the quarter reflects the ongoing improvement in the economic outlook. Recent data has mostly been positive, particularly October employment numbers which showed 24,500 new jobs when the expectation before the release had been for a loss of 10,000. While consumer confidence dropped back a little in November, it is still at a historically high level. And forecasters have again been revising up their views of how 2010 will pan out. The Reserve Bank now expects growth next year of 3.25 percent, a full one percentage point more than it had reckoned on in its previous (August) forecasts. There may also be further upwards revisions to come. The Westpac- Melbourne Institute leading indicator has continued to rise sharply, suggesting solid growth ahead, and Westpac is forecasting four percent growth for next year. It's not hard to see why the sharemarket has liked the look of all of this, but the recent levelling out also indicates that investors are now likely to want to see further hard evidence of these improved prospects before taking shares further.
INTERNATIONAL SHARES
Review
World shares have had a good quarter, but as with local equities, it's been a game of two halves – strong in August and the first half of September, but more subdued since. The MSCI World Index was up nine percent for the past three months in overseas currency terms, but only 0.70 percent over the past month. The decent quarterly gain in overseas currency terms has not translated into equivalent local currency gains, because of the strong Aussie dollar: world shares in $A were up only 1.30 percent. This pattern of a strong start followed by plateauing more recently was pretty much ubiquitous. As examples, the S&P500 Index in the US rose 8.90 percent for the quarter but dropped 0.30 percent over the past month, while the MSCI Europe Index was up 9.60 percent over the quarter but down 2.10 percent for the month. Japan and China were the only major exceptions. Although latest Japanese GDP numbers were rather stronger than expected (the economy grew by 1.20 percent in the September quarter against expectations of 0.60 percent), the Japanese sharemarket appears to have been more concerned about ongoing deflation (domestic prices were falling at a 2.60 percent annual rate in the quarter), and the Topix index is down 11.20 percent. In China, the opposite happened, where local investors became more confident about the outlook, and the Shanghai Composite Index was up strongly for the month (9.30 percent) and quarter (19.20 percent).
Outlook
The global sharemarket recovery is an outcome of increased optimism about the economic outlook. In its October World Economic Outlook , for instance, the International Monetary Fund stated that it now expects the contraction in global economic output in 2009 to be a little less than it thought three months ago (-1.10 percent rather than -1.40 percent), and upped its prediction of world growth in 2010 from 2.50 to 3.10 percent. Similarly, the OECD in just released forecasts for its developed economy members now expects 1.90 percent growth next year (in June it had been picking only 0.70 percent), and for growth to keep on rolling into 2011 at a 2.50 percent rate. While forecasters are more upbeat than they were, it's also clear that there are still risks that might derail the expected improvement. The IMF, for example, noted that monetary or fiscal policy support might be withdrawn too early before a genuine widely-based recovery had taken place. Banks are still not strong enough to cope with another setback to their loan books. And the world economy is not robust enough to deal with a left-field event like a new flu pandemic or a new surge in oil prices. In these circumstances it's not surprising to see shares levelling out at their new higher levels: there have been good reasons for them to rise, but equally investors now seem to want to wait and see some further evidence that the outlook is indeed evolving along the expected path of improvement.
Performance periods refer to the month and three months to 23 November 2009.
Provided by Morningstar
Information contained in this document is General Advice and does not take into account any person's particular financial objectives, situation or particular needs. Before making a financial decision based on this advice you should consider, with or without the assistance of a financial adviser, whether it is appropriate to your particular financial needs, objectives and circumstances.
