Monthly Financial Markets Update – February 2015

Global equity prices in developed markets lost 0.5% in January, with strong gains in Europe offset by weakness in the United States. Australian shares rose 3.3% while the Australian dollar fell four cents to US$0.78, against a strengthening US Dollar.

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The start of the New Year was a rocky period for global shares markets which fell before recovering to finish January down 0.5%. Markets were spooked by lower oil prices and uncertainty around the extent of the European Union’s (EU) quantitative easing program.

Strong gains in Europe were offset by weakness in the United States.The US market was 3% lower, Europe was up 3.9% while Australian shares rose 3.3%.

Despite share market optimism, global growth remains weak, with the International Monetary Fund (IMF) downgrading world growth expectations for 2015 from 3.8% to 3.5%.

Global bond yields continued to decline with extended low inflationary expectations, sub-trend growth and the likelihood that the US Federal Reserve will remain ‘patient’ and data dependent on its decision to raise cash rates.

Across currencies, the US Dollar has continued to strengthen against most currencies, appreciating 7.2% against the Euro. Oil prices continued their sharp decline in January, down 9.4% and representing a decline of 47% over the past four months.

China continues to contract and reported GDP growth of 7.3% in 2014, below the Government’s forecast rate.

Implications for investors

Global equity market valuations do not appear extended in a low interest rate environment and an expansion in price-to-earnings multiples is expected to continue. Lower oil prices, lower interest rates, improved consumer confidence and continued earnings growth provides conditions for global equity markets to continue improving over the short-to-medium term.

Australian equities market and our recommendations

Australian shares rose 3.3% in January. We continue to favour domestic equities sectors which benefit from the fall in the Australian Dollar and lower fuel prices. These include certain healthcare stocks, particularly those with a global revenue base, as well as consumer discretionary areas which benefit from increased international inflows such as tourism and gaming.

Australian Dollar

The Australian Dollar continued to lose ground against a stronger US Dollar in January, falling from US$0.8184 to US0.7788 at month end, a near 5% decline. Almost all of the decline in the exchange rate related to ongoing strengthening in the US Dollar with the Dollar Index (which measures the US Dollar against a basket of major currencies) appreciating by 4.9% in January. The US Dollar’s strength is attributed to good economic data there, plus comments from the US Fed pointing to a short term interest rate rise in mid-2015.

Residential property

Australian capital city dwelling prices rose 1.3% in January led by Melbourne at 2.7% and Sydney at 1.4%. Over the year to January end, capital city prices rose 8%, with the highest gains in Sydney (13%) followed by Melbourne (7%) while price rises in other capitals were more subdued (-0.3% – 4.6%). Sydney continues to show the highest capital city growth rates with prices 57% higher than they were during the financial crisis in January 2009. Prices in Melbourne are up 50% over the same period.

The rate of price appreciation has moderated since mid-2014 when annual growth peaked at 11.5% versus the 8% current annual return. Detached houses continue to generate stronger price growth – up 8.2% over the past year versus 6.2% growth for units.

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