The Australian sharemarket ended February higher, with the All Ordinaries Index up 1.2% at 4,651.1 points.
International markets were also generally higher in February. The Dow Jones Index closed up 2.6%, the FTSE closed up 3.2%, the Hang Seng closed up 2.4% and the Nikkei 225 closed down 0.7% for the month.
It was amonth of high market volatility, driven by renewed fears of a sovereign debt default in European markets. Offsetting these fears was a solid domestic profit reporting season.
The Australian sharemarket reached a three month low on the 9th of February – only to rebound by 3% during the second half of the month. The negative sentiment was attributable to European sovereign debt concerns (and in particular concerns in relation to the Greece Government’s ability to repay its debts) and poor US unemployment results.Notwithstanding the international negative sentiment, many Australian companies have continued to show resilience with profit results meeting (or exceeding) many analyst expectations.
Reporting season does often lead to a volatile trading period. However, on the whole, company profits have been robust.
Financial and resource shares led the way with strong profit results. Better performing companies included Woolworths, AGL Energy, ANZ Bank, NIB, CSL Limited, Westpac, Bendigo Bank, Insurance Australia Group and Aristocrat Leisure.
Having passed through the profit reporting season without any significant issues, we have renewed optimism in the prospects of the Australian sharemarket for the remainder of the year. We expect the Australian market to continue its upward trend, and have updated our year-end target to 5,200 points (up 12%).
We do expect volatility to persist for the foreseeable future. This is due to the uncertainties associatedwith sovereign debt in Europe, and poor consumer confidence and housing data in the United States. In light of theseconcerns, we have a preference to higher weighting to Australian shares in our client portfolios. Generally, the Australian market has a higher exposure to the emerging markets of Asia (and in particular China).
In other economic news, the Reserve Bank of Australia surprised most economists by keeping interest rates on hold in February. The RBA cash rate remains at 3.75% per annum. However we note that there is a meeting tomorrow to discuss interest rates. Economists are divided on the prospects of a rate increase in March.
We retain our view that interest rates will continue to trend upward by 1% to 1.5% over the next 18 months. The timing of any future rate increases is uncertain, however we consider it prudent for clients to factor into their family budgets higher mortgage repayments.
TheAustralian dollar had a mixed month of trade (mainly due to the surprise decision of the RBA to keep interest rates on hold). The Australian dollar is currently buying 89.39 US cents.
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