It was a poor start to 2014 for investment markets, as worries about the strength of emerging market economies and the global impact of the US Federal Reserve winding back of its economic stimulus program weighed heavily.
The Australian share market performed well in context of the global share market performance, falling 2.8% to close January at 5,201.1 points. In the US the Dow Jones Index fell 5.3%, in London the FTSE fell 3.5%, in Hong Kong the Hang Seng Index fell 5.5% and in Japan the Nikkei 225 Index fell 5.5% for the month of January.
While January’s share market performance was poor, it must be viewed in context of the strong returns experienced in calendar 2013 (Australian shares +15% and US shares +23%).
In a move that was widely expected, the US Federal Reserve (the “Fed”), which is the equivalent of the RBA in Australia, said it would reduce its bond-buying program to US$65 billion in February (down from US$75 billion in January). The Fed had been purchasing US$85 billion in bonds each month since September 2012 in an attempt to stimulate the US economy. But it began reducing the program last month, a process Wall Street has nicknamed "tapering."
In an official statement, the Fed sounded more upbeat about the US economy, noting the data since it last met in December "indicates that growth in economic activity picked up in recent quarters." The decision was unanimous among the Fed's ten voting members, and seems to indicate officials aren't too concerned about a weak December US jobs report.
The upbeat nature of the Fed’s commentary should been seen as a positive for investors. Likewise, the fact that the Fed is willing to ease it economic stimulus shows confidence that the largest economy in the world is set for a sustained economic recovery. A good thing for all of us!
In context of the recent mixed global economic news, the domestic property market is showing no signs of slowing..... adding confidence to the overall Australian economy. According to Australia’s most timely indicator of housing market conditions, the RP Data-Rismark Home Value Index, a 2.7% rise in the average of all eight capital city dwelling values was recorded over the three months to the end of January.
Leading the change in dwelling values over the quarter was Hobart (+5.8%), Melbourne (+3.4%), Perth (+3.1%), Brisbane (+2.7%) and Sydney (+2.5%). However, all eight capital cities recorded gains over the quarter, with Darwin (+0.8%) the only capital city to record quarterly gains below 1%.
The latest Index results showed that average capital city dwelling values and are now 4.8% higher than their previous peak in October 2010, with Sydney being the standout market (+11.8% from the previous market peak) followed by Melbourne (+2.6% from the previous market peak).
For property investors, rental rates continued to grow at a slower pace than property values. This has the effect of eroding rental yields, with an average capital city rental yield of 3.9% for houses and 4.7% for units. The markets where dwelling values have shown the most appreciation in recent times (Melbourne and Sydney) are now showing gross rental yields for units of 4.2% per annum and 4.7% per annum respectively.
While lower rental yields may detract property investors, rental yields generally lag property values. Furthermore, the current low interest rate environment helps buffer against lower rental yields, along with the favorable "negative gearing" tax benefits of owning an investment property.
The RBA Board did not meet in January, with the next meeting tomorrow and subsequent rate announcement at 230PM (EST). The expectation is for the RBA Cash Rate to remain on hold at 2.50% per annum. The Australian Dollar weakened by 1.4% in January, with 1 Australian Dollar currently buying 87.64 US cents.
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.