Update on Market Volatility
For most investors returns in the 2011 financial year were solid, although certainly not spectacular. After the large negative returns that occurred during the Global Financial Crisis of 2008 and the continued uncertainty throughout much of the world solid returns are something to be happy about. In fact, over the last 12 months all the major asset classes produced positive returns.
|
Asset class
|
12 months to June 2011
|
|
Australian shares
|
11.7%
|
|
International shares - unhedged
|
3.2%
|
|
International shares - local currencies
|
22.9%
|
|
Australian Listed Property
|
5.8%
|
|
International Listed Property - unhedged
|
5.2%
|
|
International Listed Property - local currencies
|
12.7%
|
|
Australian fixed interest
|
5.5%
|
|
International fixed interest
|
5.4%
|
|
Cash
|
4.9%
|
Probably the major investment factor for Australian investors has been the spectacular rise of the Australian dollar. This meant a huge difference in returns for those investments that were currency hedged (meaning foreign assets were valued in constant Australian dollars) and those which were not currency hedged (meaning the assets were valued in the foreign currency, and the change in the value of that currency against the Australian dollar was reflected in the return from that asset). For example, international shares returned around 3% in Australian dollars but in local currencies the returns were nearly 23%. The difference was due to the 20% appreciation of the Australian dollar against those currencies.
For the coming year we look with concern at some of the issues that continue to face the worldwide economy, particularly inflation, overcapacity in the world’s factories and stagflation (which is lack of economic growth combined with rising prices). What the past year has shown is that even when the world faces uncertainty financial markets can still perform. The US policies of easy/zero cost money and high budget deficits contributed to the rise of asset prices around the world but also led to the appreciation of the Australian dollar. In other words, some things can’t be predicted with a great deal of certainty.
If we did have a crystal ball for the coming year, we would be looking for another round of quantitative easing in the US (which should help share markets and precious metals but lead to a lower US dollar/higher Australian dollar) due to continued weakness in the US economy. In Europe there will be continued tension between euro countries, particularly between Germany and the rest. If Greece officially defaults on its debt it will have to leave the European Union and return to the drachma. The more likely scenario is that Germany, and in particular German banks, will pressure Greece to stay in the union, embrace austerity measures and eventually repay its debt. The overall crisis in Europe can’t be contained in just a few “bad apple” countries. The entire EU is responsible and at some stage will have to balance its books. From an economic perspective, this will inevitably lead to several years of below average growth.
No market commentary is complete without some mention of China. Apart from anything else, China represents more than 50% of consumption in the key Australian export commodities. The main story here is that China has recently reversed its policies from market based activity in favour of greater Government direction and state owned enterprise activity. This has supported current economic figures and smoothed a lot of pressures.
Despite all these concerns there is no escaping the fact that the world is becoming wealthier. As people get richer the discretionary part of income gets larger and they spend their money in different ways (think how the gadgets we use have changed in the past 10 years and how brands and status goods seem to dominate some people’s purchases). All of this represents new business and investment opportunities.
In conclusion, the 2011 financial year was tough but the returns were acceptable. The next 12 months look to be just as interesting.
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