Monthly Financial Markets Update – December 2014

Global equity markets extended the October sharp rally through November, while gains were broadly based in Europe, Japan and the United States. Locally, fourth quarter data continues to show improvement in business credit and capital investment from non-mining sectors.

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Global equity markets extended the October sharp rally through November with the MSCI World equity index 2.9% higher. Gains were broadly based in Europe, Japan and the United States.

Following further weak Eurozone manufacturing data, the European Central Bank has indicated that there will be further monetary easing in order to stabilise the deflationary forces. These announcements have provided positive tailwinds for European equity markets with the German DAX equity index up 7% in November.

The US economy should remain a dominant driver of growth, with expectations of 2.9% growth in 2015, helped by lower energy costs and supportive fiscal policy. Under these circumstances having global equity exposure is a prerequisite.

We have not changed our views on the US market and the emphasis is on having continued strong exposure to US equities, with healthcare, technology and telecommunications the favoured sectors.

Japan also has a preferred bias, a lower Yen leading to increased corporate earnings. Europe remains on a neutral weighting until we start to see further evidence that it’s gaining traction.

China has lowered interest rates in order to provide further broad economic stimulus.

Australian equities market

The ASX200 index lost 3.3%, on the back of the weaker oil and iron ore prices as well as sluggish Q3 GDP data. Australian economic data continues to adjust to declining mining investment.

Fourth quarter data continues to show improvement in business credit and capital investment from non-mining sectors. Residential construction continues to improve while the currency decline is helpful overall.

Australian Dollar

During November, the Australian Dollar fell from US$0.8794 to US$0.8509, a fall of nearly three US cents. The decline was due to the fall in commodity prices combined with a general strengthening in the US Dollar.

According to NAB’s FX Strategy Team, between 2001 and 2011, Australia’s Terms of Trade (the prices of our exports relative to the prices of our imports) doubled, and the Australian Dollar appreciated by about 70% in trade-weighted terms.

Based on median forecasts surveyed by Thomson Reuters, market expectations are for the currency to trade at 81 US cents at the end of November 2015. Given the recent drop in the currency to US$0.8240 (as at 9 December), after the survey was undertaken, it is likely that these currency forecasts will be revised lower.

Australian residential property

According to the Core Logic RP Data Hedonic Home Value Indices, Australian capital city dwelling prices declined 0.3% in November and have only risen 0.8% in the past three months. Sydney was again the strongest capital with prices 1% higher. Over the past year, prices rose 8.5% (down from 8.9% last month and 11.5% in April) indicating that the rate of overall annual growth has slowed.

Auction clearance rates in Sydney and Melbourne have dropped back in recent weeks pointing to slightly weaker conditions, although they are still at relatively healthy levels of 65-70%. Clearance rates may be impacted by the upward trend in the number of properties for sale hitting the market.

On the supply side, building approvals bounced back in October rising 11.4% and reversing the fall in September, with the result boosted by a 31% rise in apartment approvals concentrated in Sydney and Melbourne. The Reserve Bank of Australia remains concerned about the level of investor activity in the Sydney and Melbourne apartment markets, which has been one of the reasons it is reluctant to reduce interest rates further, despite evidence that the economy is not growing at the level it had been expecting.

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Please note: Nick Ryder’s Monthly Financial Markets video update will return in February 2015.