It was another volatile month for the Australian share market, with the All Ordinaries Index increasing by 1.7% in December to close 2014 at 5,388.6 points. For the 2014 calendar year, Australian shares gained a modest 0.7% (although when allowing for dividends the total return was more like 5%).
Global shares were mixed in December, with the US Dow Jones Index flat, the London FTSE falling 2.3%, the Hong Kong Hang Seng Index falling 1.6% and the Japan Nikkei 225 Index falling 0.1%. When looking back at 2014, the clear winner in share market price performance was the Dow Jones Index in the United States (refer to DOW in the chart below).
In addition to the stronger prices gains with US shares, the Australian dollar fell by over 8.5% in the latter half of 2014. This further boosted international investor returns on an Australian dollar basis.
The end of a year is always a good time to reflect on the year past and attempt to make some "bold" predictions for the year ahead! This time last year I had set a 2014 year-end target for the All Ordinaries Index of 5,750 to 6,000 points. I had forecast a 5 to 10% fall for the Australian dollar and predicted the property market to continue to gain momentum. Two out of three correct isn't too bad...
Looking forward, I expect similar themes to continue for 2015. Most notably, I foresee a continual decline in the Australian dollar to 70 to 75 US cents by the end of 2015. This is supported by my view that the US economy will continue to progress well (particularly as now very low oil prices stimulate the US economy) and as the US Federal Reserve looks to increase interest rates away from Global Financial Crisis stimulant levels.
On the domestic front, there are some headwinds for the Australian economy as highlighted in Treasurer Joe Hockey's MYEFO update in December (which was poorly timed on the same day as the Lindt Café siege in Sydney) and as noted in recent monthly newsletters.
Falling commodity prices have added further pressure to an already constrained Federal Budget. This, along with a Senate that is unpredictable, is not a good mix for economic growth and confidence. Consequently, don't be surprised if business and consumer confidence drops, unemployment continues to rise and the dreaded "R word" (recession) is at the forefront of our minds towards the end of 2015.
Nevertheless, Australian shares have arguably already "priced-in" the majority of the downside risks facing the economy (look no further than BHP shares trading at under $30 per share). Therefore, modest share price growth is achievable in 2015 (especially if commodity prices turn-around and the China story picks up again). I will repeat my target for the All Ordinaries Index for 2015 (i.e. to close between 5,750 and 6,000 points by the end of the year). However, volatility will once again be a key theme for 2015.
I expect interest rates to remain at 2.50% throughout 2015. Indeed, if there is a rate change, I believe that there is more chance of a rate cut (rather than an increase) when factoring the domestic economic outlook. Notwithstanding my view is that rates will remain at 2.50%, I wouldn't be surprised if the RBA pulls a rate cut trigger early in 2015 to stimulate the economy and try to avoid a drop in consumer confidence.
Typically, low interest rates are a stimulant for property price growth. However, I expect the property market momentum to slow in the latter stages of 2015 (coinciding with what I think will be a spike in unemployment and a general drop in consumer confidence) with a net result of capital city property prices being flat in 2015. However, if the RBA does aggressively cut interest rates, and consequently property prices continue to surge, the risks of a "property market bubble" could present in 2016.
Finally, as I noted this time last year, diversification amongst an investors' assets will continue to remain key in ensuring that returns are insulated from any hiccups that may occur in the year ahead. This proved to be correct in 2014 and I see no reason why it will not be the same for 2015 and beyond.
For more information please contact Ryan Love on 1300 856 338 or e-mail ryan.love@apexpartners.com.au.
This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.