The Australian share market finished 2013 in a somewhat subdued fashion gaining 0.7% in the month of December to close at 5,353.10 points. Nevertheless, 2013 was a stellar year for the Australian share market recording a 14.8% gain for the year (far exceeding my expectations from this time last year).
Global shares were once again mixed in December with the Dow Jones Index gaining 3.0%, the FTSE gaining 1.5%, the Hang Seng falling 2.4% and the Nikkei 225 gaining 4.3% for the month. The chart below shows the returns of key global share markets through calendar 2013.
Source: Yahoo Finance
As noted in the above chart, the US market in particular (represented by the Dow) had an outstanding calendar 2013 (increasing by over 23% for the year). Clearly the US economy is well into a recovery phase and the US central bank’s economic stimulus measures have been a success for investors.
With the US unemployment rate now falling to 7%, discussion has shifted back to when the US central bank will begin to ease its economic stimulus program. In May 2013 the US Federal Reserve began the process of conditioning markets to the idea of a “tapering” to its stimulus program in two phases. The first phase is for the US Federal Reserve to wind back its quantitative easing program. The second phase is for conventional monetary tightening via increasing interest rates.
Response to the Federal Reserve’s comments in May 2013 was profound, with the Australian share market falling nearly 5% in the month of May alone (despite no “tapering” actually taking place). Therefore, in knowledge that the Federal Reserve will begin “tapering” in 2014, what will be the impact to investors?
It is arguable that the first phase of the US Federal Reserve “tapering” measures are already been priced into markets, with bond yields at historically low rates by any measure. The second phase of “tapering” will have a far more profound impact to markets in my view.
As was experienced in May 2013, any further news of “tapering” may be seen as a negative for share market investors, leading to a heightened level of volatility. Nevertheless, “tapering” is a good thing as it means that the US Federal Reserve is comfortable that the largest economy in the world is along a sustainable economic recovery path. Consequently, I am upbeat on the prospects for share market returns in 2014, with a forecast target for the All Ordinaries Index of 5,750 to 6,000 points (an increase of 7.5% to 10%) by the end of 2014.
Should interest rates begin to increase in the US, expect the Australian Dollar to continue its downward trend. The Australian dollar fell over 15% in 2013 and is currently buying 88.89 US cents. It is not unreasonable to expect the Australian Dollar to fall a further 5 to 10% for calendar 2014.
I also believe that we are at (or near) the bottom of the interest rate cycle in Australia, noting that the RBA cut the cash rate by 0.50% in 2013 to its current level of 2.50% per annum. Historically low interest rates have led to a buoyant domestic property market, which I expect to continue to gain momentum in early 2014 despite the potential for an increase to interest rates in the latter stages of 2014.
In an environment of potentially increasing interest rates, bond returns are expected to continue to remain under pressure in 2014, with investment-grade corporate credit offering a more attractive “risk-reward” payoff than government bonds in my view.
Finally, with global economic uncertainty still prevailing in key markets, diversification amongst an investors assets will continue to remain a key in ensuring that returns are insulated from any hiccups that may occur in the year ahead.
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.