The Australian share market finished the calendar year on 18-month highs, Treasurer Wayne Swan abandoned the idea of a budget surplus, the RBA cut interest rates and the fiscal cliff in the United States was avoided... well for the time being!
The All Ordinaries index finished December up 3.2% at 4,664.6 points, marking a 13.5% rise for the 2012 calendar year and the highest level since July 2011. Global shares also finished the year strongly with the Dow Jones Index gaining 0.6%, the FTSE gaining 0.5%, the Nikkei 225 gaining a staggering 10.0% and the Hang Seng gaining 2.8% in December.
All attention was on the US congress and its ability to negotiate a deal to avoid the so called fiscal cliff. At the dramatic hour of 2am on the 1st of January (US local time) a deal was reached.
In essence, it was agreed to raise taxes on families earning in excess of US$450,000 as well as stem any cuts in domestic and military spending regimes and extend any unemployment benefits in place.
While the deal is positive for markets, and it should ensure that the US can continue with its modest economic recovery, much focus will likely be on the US government's debt ceiling and spending cuts in the coming months.
In domestic political news, just before Christmas (and conveniently once parliament had broken for its holiday period), federal Treasurer Wayne Swann abandoned the idea of returning the Federal Budget to surplus this financial year. I was never convinced that a surplus would be achieved in any event.
With last year turning out to be a successful year for investors, it is reasonable to ask whether 2013 will be a repeat of 2012. After all, this time last year global financial markets were in the midst of the European debt crisis and all seemed lost.
It is important to note that the surge in Australian share prices in the second half of 2012 was driven principally from a change in valuations rather than from growth in company earnings. In other words, investors all of a sudden decided that shares were cheap!
This change to investor mindset meant that share price increases were dominated from higher yielding sectors including banks and telcos, which outperformed the lower yielding sectors of energy and materials. With interest rates and bond yields at historical lows this ought not to be surprising.
In overseas markets, US shares did achieve company earnings growth (on an Earnings-Per-Share basis) last year. However the key driver behind the EPS growth in many US shares was deep cost cutting post the Global Financial Crisis. While this raised productivity and earnings growth, one has to wonder how much longer this can last.
As we look toward 2013 we face a similar set of issues to this time 12-months ago. Europe remains a mess, the US congress will need to agree on a new debt ceiling (in as early as February), the outlook for domestic jobs growth is sluggish at best and the capital expenditure in the mining sector is likely to reach its peak soon.
Offsetting the above negatives are positive signs that China’s economy is set for a slowing of growth rather than any serious downturn, an expectation of further domestic interest rate cuts and whatever it takes attitude from central banks around the world to support their economies.
Given the above, 2013 is looking very similar to 2012, although higher starting share valuations will make similar share market returns just that little bit harder. I expect volatility to remain a feature of investment markets, although I am hopeful of modest growth in share prices in the region of 3% to 6% for the year as the pursuit of dividend yield continues.
To interest rate news, following the 0.25% rate cut in December, the RBA cash rate is currently 3.00% per annum. This level was once described as an 'emergency level' during the height of the Global Financial Crisis, by Treasurer Wayne Swan. Nevertheless, further cuts are expected in 2013.
The consensus forecast appears to be a cash rate of 2.50% per annum by the end of the year. However, how much of any future interest rate cuts will be passed on by the banks is questionable.
Importantly, unlike previous interest rate easing cycles, the domestic property market has displayed an anaemic reaction to the cuts. Perhaps households prefer to deleverage rather than taking on more debt. This attitude leads me to think that property values will remain subdued for 2013.
The Australian Dollar remained strong throughout 2012 and is currently buying US104.71 cents.
Demand for commodities, the US Federal Reserve continuing to pump the money supply and an attractive government bond yield by international standards (that’s right 3.41% per annum on 10-year bonds is attractive) should see the Australian dollar remain well supported in the immediate future.
Nevertheless, the demand drivers noted above will eventually come end. Exactly when this will occur is anyone’s guess although it is hard to see this being in 2013 and perhaps not even 2014.
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.