A good year, or a very good year?

From

Economic & financial perspectives

  • Overall, it has been a positive year.

    Overall, it has been a positive year.

    A good year:  Total returns on Australian shares (All Ordinaries Accumulation index) are currently up 17.3 per cent over 2013/14. If returns hold at these levels through to June 30 then investors will have experienced the best back-to back returns in seven years.

  • Other returns higher: Returns on dwellings are up 15.3 per cent while returns on government bonds have lifted by 4.2 per cent. A rare event – bonds, property and shares have all lifted over the past year.

What does it all mean?

  • In just over a week’s time investors are going to get inundated by data showing how investments, financial markets and economies have performed over the past year. But with the 2013/14 year now 97 per cent complete, we can provide a guide to how things have tracked.
  • Overall, it has been a positive year, despite a raft of challenges such as geopolitical events (Egypt, Tunisia, Libya, Ukraine and Iraq, to name a few), the Federal Election, the shutdown of the US Government and even weather events like the harsh winter experienced in the Northern Hemisphere.
  • Returns on shares, residential property and bonds have all lifted over the past year while interest rates and the Aussie dollar have ended little-changed on a year ago.
  • The economy has grown by around 3 per cent in 2013/14 and we expect growth of around 3.3 per cent next year. Inflation may ease from 2.7 per cent to 2.4 per cent over the coming financial year while unemployment may hold reasonably steady just below 6 per cent.
  • What this all means is that it has been a very good twelve months for our economy and investments. While people may fret about the Budget, if they took a big picture view they would realise that there is little to worry about.

What does the data show?

Interest rates

  • The cash rate stands at a 54-year low of 2.5 per cent, down from 2.75 per cent at the end of June 2013, and courtesy of quarter percent rate cut in August.
  • The market-determined 90-day bank bill rate has fallen from 2.81 per cent to 2.70 per cent over 2013/14. Yields on the long bond – 10-year government bonds – are little-changed on a year ago at 3.75 per cent.

Currencies

  • The Aussie dollar is also little-changed over the year. The Aussie finished 2012/13 at US92.75c and currently stands at US93.35c. We have calculated that the Aussie is 34thstrongest against the US dollar of 117 currencies tracked. The strongest currencies have been South Korea won (up 11 per cent), UK pound (up 10 per cent) and New Zealand dollar (up 10 per cent). Weakest currencies have been Iran rial (down 109 per cent), Ghana cedi (down 56 per cent) and Argentina peso (down 51 per cent).
  • In the six months of 2014, the Aussie dollar is up 4.4 per cent against the US dollar, making it the fourth strongest currency in the world. The strongest currencies have been the Papua New Guinea kina (up 8 per cent), Malawi kwacha (up 7 per cent), Pakistan rupee (up 6.5 per cent) and New Zealand dollar (up 5 per cent). Weakest currencies have been Ghana cedi (down 35 per cent), Argentina peso (down 25 per cent) and Costa Rica colón (down 11 per cent).
  • The high for the Aussie dollar in 2013/14 was US97.55c on October 23 2013 and the low was US86.58 cents on January 24 2014.

Commodities

  • The Commodity Research Bureau index of commodities prices has lifted by around 12 per cent over 2013/14, outperforming the Aussie dollar.
  • In terms of those commodities with particular relevance to investors or the economy as a whole, the gold price has lifted 4 per cent over 2013/14 with beef up almost 12 per cent, crude oil up 10 per cent , nickel up 40 per cent and zinc up 16 per cent. Amongst the declines have been rice (down 25 per cent), thermal coal (down 8 per cent), wheat (down 11 per cent) and iron ore (down 23 per cent).

Sharemarket

  • The Australian sharemarket started 2013/14 with the All Ordinaries at 4,775.4 and currently the All Ords is near 5,370 points, up 12.5 per cent on the year. We estimate that Australia is 39th of 73 global bourses, or around the mid-point of bourses. Best performer has been Argentina (+152 per cent) followed by Venezuela (up 88 per cent) and Egypt (up 77 per cent). Worst performers have been Zimbabwe (down 14 per cent), Kuwait (down 9 per cent) and Chile (down 5 per cent).
  • In the six months of 2014, the All Ordinaries has only risen by 0.4 per cent, ranking Australia 55th of 73 nations. The strongest performer has been Ukraine (up 46 per cent), followed by Argentina (up 39 per cent) and Egypt (up 24 per cent). Worst performer has been Venezuela (down 21 per cent), Zimbabwe (down 10 per cent) and Japan (down 8 per cent).

Investment returns

  • Total returns on Australian shares (All Ordinaries Accumulation index) are currently up 17.3 per cent over 2013/14. Returns on dwellings are up 15.3 per cent while returns on government bonds have lifted by 4.2 per cent. A rare event – bonds, property and shares all rising over the past year.
    • In a broad sense, it has been a good year for investors. Total returns on shares are up by over 17 per cent since the start of the financial year after posting returns in excess of 20 per cent in the previous financial year. Apart from the 2003/04 to 2005/06 period, the past two years stand-out as amongst the best in the past 15 years. It is rare to get returns growing almost 40 per cent in the space of two years.
    • If five or 10 years ago someone told you that Australia would have inflation near 2.7 per cent, economic growth near 3.5 per cent, unemployment below 6 per cent, a cash rate at 2.5 per cent and Aussie dollar near US94 cents, you would have cast dispersions on their economic abilities. But those are the metrics operating in Australia. Add in the fact that the broad trade position – the current account – has produced the smallest deficit in 34 years and that is the icing on the cake.
    • CommSec expects the All Ordinaries index to be at 5,700 points at end-December 2014 and 6,000-6,200 points in June 2015. Home prices are likely to grow by 5-7 per cent in 2014/15 with inflation averaging 2.4 per cent. The Aussie dollar is seen at US97 cents by December and US95 cents in June 2015.
    • The bottom line is that investors need to maintain research on asset class performance to ensure that they aren’t missing out returns in high-performing markets.

What are the implications for investors?

  • In a broad sense, it has been a good year for investors. Total returns on shares are up by over 17 per cent since the start of the financial year after posting returns in excess of 20 per cent in the previous financial year. Apart from the 2003/04 to 2005/06 period, the past two years stand-out as amongst the best in the past 15 years. It is rare to get returns growing almost 40 per cent in the space of two years.
  • If five or 10 years ago someone told you that Australia would have inflation near 2.7 per cent, economic growth near 3.5 per cent, unemployment below 6 per cent, a cash rate at 2.5 per cent and Aussie dollar near US94 cents, you would have cast dispersions on their economic abilities. But those are the metrics operating in Australia. Add in the fact that the broad trade position – the current account – has produced the smallest deficit in 34 years and that is the icing on the cake.
  • CommSec expects the All Ordinaries index to be at 5,700 points at end-December 2014 and 6,000-6,200 points in June 2015. Home prices are likely to grow by 5-7 per cent in 2014/15 with inflation averaging 2.4 per cent. The Aussie dollar is seen at US97 cents by December and US95 cents in June 2015.
  • The bottom line is that investors need to maintain research on asset class performance to ensure that they aren’t missing out returns in high-performing markets.

 

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