Welcome to the 2014 Winter Edition of the BFG Report.
First Quarter Down, Outlook Improving
The last calendar year was an excellent year for growth assets. As anticipated, we believe it will be difficult to achieve similar returns in 2014 and the first quarter illustrated exactly that. The first quarter of 2014 saw modest gains across most asset categories. A strengthening Australian currency, however, was a drag on sector returns. While there are concerns that international share markets are trading at fairly full valuations along a variety of different metrics, we still believe that risk will be rewarded and well-structured portfolios can achieve realistic investment goals.
In the US, public sector revenues have improved due to stronger consumption and higher asset prices which have led to higher tax receipts. The outlook for corporate capital expenditure is positive and consumer confidence is robust due to recent gains in housing, share prices as well as employment growth. This is all good news for GDP growth. On the downside, however, the outlook for corporate earnings is not as promising as several large companies issued negative outlook statements in February and early March.
Europe / Asia
Across Europe, both business and consumer confidence have improved which is likely to lead to more robust business and consumer spending. In China, however, credit conditions have tightened and manufacturing activity has been relatively weak, but the improving economic conditions in the US and Europe bode well for exporters. In Japan, the recent increase in sales tax is likely to dampen consumption and slow GDP growth.
The outlook for Australian economic growth has recently improved due to a sharp rise in building approvals and stronger consumer confidence. This has been driven by recent house price appreciation which is likely to have a sustained positive impact on consumer sentiment. Retail sales have been strong and consumer spending and construction activity are likely to be robust in the months ahead. Unfortunately, however, the employment outlook is quite weak, particularly youth unemployment, and it is expected that the unemployment rate may rise modestly throughout the year.
In recent years, there has been an extremely high level of mining-related investment and related capital expenditure. Going forward, however, the main economic concern for the Australian market will be lacklustre business investment. In the medium term, Government spending is also likely to be a detractor from GDP growth as the Government attempts to address budget deficits that have become structural in nature.
In the current environment of lower returns, the challenge will be to achieve the required rate of return at a tolerable level of risk.
Investment Market Review – Quarter Ending 31 March 2014
|Asset||Index||1 year return
|5 year return % pa||Comments|
|Australian shares||S&P/ASX 300 Accumulation index||10.14||12.32||The mining-heavy materials sector underperformed as iron ore prices fell, while rallying bonds supported the yield-heavy sectors including REITs, utilities and the banks. Coca-Cola Amatil downgraded first-half CY14 guidance to a 15 % decline in earnings (pre-significant items). Woolworths and Coles both reported March quarter like-for-like (LFL) sales growth of 3.5%. This is the first time Coles did not lead Woolworths in LFL sales growth in 18 quarters. Wesfarmers announced the sale
of its insurance brokering business.
|Listed property trusts||S&P/ASX 300 A-REIT index (property)||2.51||15.55||The S&P/ASX 300 A-REIT sector underperformed Australian shares. However, S&P/ASX 200 REITs (up 5.7%) outperformed the S&P/ASX 200 (up 1.8%) by 393 basis points in April 2014, as the long bond rate fell 13 basis points. This is the largest outperformance since May 2012 and is only the second month of outperformance in the last ten years. All REITs, aside from ALE Property Group (LEP), finished positive in April, driven largely by company specific activity relating to M&A, restructuring and asset transactions.|
|International shares||MSCI World accumulation index (AUD)||31.47||10.71||International shares have continued to rise, albeit more modestly with increased volatility. The US economy is growing at a reasonable pace and most European nations are now out of recession. Geo-political issues in the Ukraine and weak first quarter earnings growth by US corporates have held back market gains (US first quarter earnings have barely grown).|
|Fixed interest and cash||UBS Warburg Comp. Bond All Maturities index||2.65||6.14||Fixed interest markets rallied over the quarter, as concerns around the situation between Ukraine and Russia continued to make headlines, along with somewhat mixed US economic data. We continue to expect persistent rate volatility as monetary policy becomes increasingly divergent among the world’s central banks.|
|Cash||UBS Bank Bill index (interest rate earned on short term to maturity of approx 45 days)||2.72||3.92||The RBA left interest rates unchanged over the quarter, with the direction of interest rates in Australia somewhat uncertain. Unemployment and inflation data points will be key variables to watch over the coming months.|
High Yielding Internet Savings Accounts
Financial Institution Interest Rate
ING Savings Maximiser 4.35% p.a.
RaboDirect – HISA 4.30% p.a.
Rams Saver 4.11% p.a.
BankWest – TeleNet Saver 4.09% p.a.
UBank – Usaver 4.01% p.a.
Citibank Online Saver 4.00% p.a.
Rates sourced from RateCity.com.au and are subject to conditions and change. Rates are correct as at 17/5/2014.