• The past financial year saw solid to strong returns from most asset classes drive good returns from balanced and growth oriented investment strategies, including from super funds.
• Investors should expect returns to slow over the year ahead, but they are likely to remain solid as share valuations are still reasonable, the global economy continues to grow, the Australian growth outlook improves and monetary conditions remain easy.

Introduction

The past financial year saw another 12 months of strong returns. Returns of around 20% from shares, solid returns from property assets and good returns from bonds saw balanced growth superannuation funds return around 13% on average. This was the second year in a row of double digit gains. By contrast the return from cash was poor and average 12 month bank term deposits returned less than 4%.

As always there has been plenty to fret about, including:

• The mid 2013 “taper tantrum” in the US, with investors fearing the Fed’s decision to start winding down its quantitative easing program would threaten the US economy and shares;
• The US Government shutdown and debt default worries in October and the March quarter economic contraction;
• The slow recovery and deflation worries in Europe;
• Fears of a sales tax hike driven recession in Japan;
• Another bout of hard landing worries regarding China centred on the property and shadow banking sectors;
• Worries about the impact on emerging countries of Fed tapering;
• Geopolitical worries regarding Syria, Ukraine and Iraq;
• Ongoing worries as to how Australia will fare as the mining boom fades and whether the May Budget will worsen the economic outlook; and
• The last six months has seen intensifying concerns that share markets are set for a fall.

But these concerns were offset by a range of factors:

• A continuing improvement in the global economy;
• The Fed’s tapering has clearly been contingent on improving growth with a rate hike still a fair way off;
• Further easing measures by the European Central Bank;
• Little global economic damage from geopolitical risks;
• Continuing record monetary stimulus in Japan;
• A stabilisation in Chinese economic growth helped by various mini-stimulus measures;
• No sign of capital flight from emerging countries and election optimism regarding India and Indonesia; and
• Okay growth in Australia helped by low interest rates.

This has all seen growth assets boosted by a reasonable growth and profit outlook and bonds helped by continued easy monetary conditions. The latter has also seen an ongoing search for yield by investors. With shares no longer dirt cheap its likely returns will slow – indeed they have over the last six months. However, the cyclical bull market in shares likely has further to go. This along with reasonable returns from property assets should underpin further gains in diversified investment portfolios over the year ahead.

Equity valuations – ok

After strong gains through 2012 and 2013 shares are no longer dirt cheap. However, as can be seen in the next chart valuation measures (which are based on a range of measures including a comparison of the yield on shares with that on bonds) show shares are not expensive.

Cyclical bull markets in shares invariably see three phases. First an unwinding of cheap valuations helped by low interest rates. The second is driven by stronger profits. And the third phase is a blow off as investor confidence becomes excessive pushing shares into expensive territory. Our assessment is that we are still in the second phase and as such the cyclical/profit backdrop remains critically important.

The economic cycle – slow improvement

We are still in the sweet spot of the global economic cycle. Growth is on the mend but only gradually such that spare capacity and excess savings remains immense so inflation remains tame, monetary conditions easy and bond yields low. In fact the March quarter growth soft patch seen in the US, Europe and China was more positive than negative because it wasn’t threatening but further pushed out the timing of any monetary tightening. By region:

• After a contraction in the March quarter driven by mostly temporary factors, the US economy is continuing to improve and looks on track for circa 3% growth. The jobs market and business investment are improving and shale oil boom is providing a long term boost both directly and indirectly via cheap electricity costs for business.
• Growth has returned to Europe. Ireland and Portugal have emerged from their bailout programs and structural reform seems to be on track. But growth is far from robust, inflation too low and uncertainty around the banks is likely to linger till later this year after the completion of the ECB’s bank asset quality review. All of which means continuing recovery but ongoing need for ECB support.
• Japan appears to be weathering its sales tax hike well, with ultra easy money and economic reforms providing confidence growth will continue.
• Chinese growth looks to be on track for around 7.5% helped by various mini-stimulus measures.
• Emerging world growth generally isn’t as strong as it used to be but it looks to be stabilising around 5%.

Reflecting this, the global manufacturing conditions PMI is at levels consistent with good, but not booming global growth.

This suggests global growth is likely to pick up a notch which should underpin a modest improvement in profit growth.

In Australia, while the mining investment slowdown, the impact on confidence from the May Budget and the too high $A pose a short term threat, underlying growth is likely to have picked up to a 3% pace by year end and continue through next year helped by a housing construction boom, a Senate induced softening in some of the harsher aspects of the Budget and strength in resource export volumes.

Monetary conditions to remain easy

When the Fed will start to raise interest rates and reverse its QE program has been a constant source of speculation. While such speculation may intensify over the next six months – resulting in bouts of volatility for investment markets – global monetary conditions are set to remain easy:

• The tightening US jobs market indicates the first rate hike in the US is coming on to the horizon. But continuing high levels of excess capacity indicate it may still be 9-12 months away and will be a gradual process when it starts. In other words it will take a long time before US monetary policy is tight – with above “normal” interest rates and short term rates being above long term rates.
• The ECB has only just eased monetary policy and has signalled it stands ready to do more, including via a quantitative easing program, if deflation risks don’t recede. Rate hikes are well over the horizon.
• Unprecedented quantitative easing in Japan will continue until underlying inflation is firmly ensconced around 2% and there is still a way to go. Rate hikes are not in sight.
• In Australia, the RBA is not expected to start raising rates till sometime next year. And as the Fed is likely to go first, the Australian dollar is likely to resume its downtrend.

While there will be a few bumps regarding the Fed (just like last year’s taper tantrum) the monetary backdrop is set to remain supportive for investment markets.

Investor sentiment a long way from excessive

We remain a long way from the sort of investor exuberance seen at major share market tops. It seems everyone is talking about share market corrections and crashes and tail risk hedging seems all the rage. In the US the mountain of money built up in bond funds during the post GFC “irrational exuberance for safety” has yet to really reverse.

And in Australia, the amount of cash sitting in the superannuation system is still double average levels seen prior to the GFC and Australians continue to prefer bank deposits and paying down debt to shares and superannuation. There is still a lot of money that can come into equity markets as confidence improves.

Concluding comments

After a bout of relatively smooth sailing there will inevitably be a correction at some point. There are plenty of possible triggers: geopolitical risks, the risk of an inflation/Fed rate hike scare, deflation in Europe, the property slowdown in China and in Australia the transition to more broad based growth. However, while investment returns are likely to slow, still reasonable share valuations, gradually improving economic conditions, easy monetary conditions and a lack of excessive optimism suggest further decent investment returns ahead.

Dr Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital

———–

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Investment outlook after another solid financial year appeared first on AdviserVoice.

Along with the surge in the Commonwealth Bank’s share price to a record high of $79.95 this week, Westpac reached a fresh high of $35.99, while ANZ broke through $35, reaching a high of $35.07 yesterday.

Partly explaining the surge in prices is the expectation of record profits in the first half reporting season, as well as anticipated higher dividends for shareholders. ANZ is expected to report its first-half profit on May 1, Westpac on May 5 and National Australia Bank on May 8.

The Commonwealth Bank has already reported its first-half profit, which surged 16 per cent to $4.27 billion, boosted by cost cutting and strong growth in mortgage lending, despite sluggish economic growth.

Russel Chesler, Director, Investments & Portfolio Strategy, Market Vectors Australia, says the big banks are attracting broad based investor support, with retail and institutional investors attracted by dividend growth as well as the big banks’ track record of delivering impressive capital gains.

“Three of the big banks are expected to unveil higher dividends in May and report strong, if not record, earnings for the first half, driven by continual cost cutting, strong growth in home lending and low levels of borrower default rates. This expectation is drawing investors to the sector, which has rallied in recent days ahead of the profit announcements,” Mr Chesler said.

“With dividend yields on banks around 5% compared to term deposits which are not yielding much more than 3%, many investors are choosing to invest in the banks. This search for yield outside of cash has seen bank share prices perform strongly this year and prices could continue to run given the powerful and entrenched market position the big banks hold in the Australian market,” Mr Chesler said.

“We’ve made it easy for people to invest in the bank sector by taking the stock selection decision making out of the investment process.  We offer investors the only exchange-traded fund (ETF) to gain pure, targeted exposure to Australian banks.  Market Vectors Australian Banks ETF which is available on the Australian Securities Exchange (ASX) under ASX code: MVB, is an efficient and cost effective way for investors to get exposure to Australia’s largest banks in a single trade.

“With a yield of 4.97% of the underlying portfolio, MVB tracks the Market Vectors Australia Banks Index, which currently provides diversified exposure to the seven largest and most liquid Australian banks.

“The Market Vectors Australia Banks Index caps any one bank’s weighting at 20 per cent to ensure no one bank dominates, removing the large capitalisation bias found in traditional market capitalisation weighted indices.  MVB is the only Banks ETF on the ASX,” Mr Chesler said.

The post CBA heads towards $80 as big banks hit record highs appeared first on AdviserVoice.

“Investors seeking yield will need to adjust their approaches”: Tyndall

At a time of record-low interest rates, chasing high-yield stocks has almost become a national pastime for income hungry investors, with the Australian share market providing attractive dividend yields and concentration of high-yielding sectors.

However, Malcolm Whitten, portfolio manager at Tyndall AM, says income-hungry investors may need to focus more on total shareholder returns to find better value, as quantitative easing and a lower interest rate environment comes to an end.

“The quantitative easing around the world has been a significant driver of global and Australian equities as investors sought higher-yielding stocks as a source of income in the face of low interest rates,” Mr Whitten said.

“But things are starting to change and investors seeking yield will need to adjust their approaches.

“While the focus lately has been primarily on the dividend yield from shares, investors can find better value and more investment opportunities by looking at the total shareholder return.

“For example, companies can increase returns to shareholders by increasing dividends, undertaking share buy-backs and successfully reinvesting in the business. Understanding a company’s future operating cashflow and capital expenditure plans are good ways to ascertain a company’s capacity to return money to shareholders,” he said.

“The strength of a company’s balance sheet, particularly gearing levels, as well as franking levels and pay-out ratios are important indicators of the sustainability of a company’s earnings and dividend stream.”

Mr Whitten added that, with interest rates very low, rate increases delayed and equities having staged a strong rally, it’s hard to see high expected returns in any asset class in the near term.

“However, while returns from equities may be lower than we have recently experienced, they should continue to provide investors with a reliable income source and the potential for some capital growth, as long as investors actively manage their portfolios.

“Actively managed portfolios are more dynamic as they allow investors to respond to changes in market circumstances, as well as helping reduce concentration risk.

“Traditional high-yielding stocks have been key drivers of the strong dividend growth, such as the banks which contributed 36% to all dividends paid in the 2013 financial year, up from 24% five years ago.

“However, at Tyndall all of our Australian share portfolios have reduced their weighting in banks as we feel that, after their incredible run, they are now overvalued.

“Furthermore, such a high contribution from one sector highlights concentration risk in the Australian share market.

“Investors beholden to hold the same stock weightings as the index are potentially exposing their portfolio to concentration risk.

“Within the four traditional high-yielding sectors in the Index (banks, telecommunication services, REITs and consumer staples), just eight ‘high-yielding’ stocks account for around 40% of the Index. The eight stocks are Commonwealth Bank, Westpac, ANZ, National Australia Bank, Telstra, Wesfarmers, Woolworths and Westfield Group.

“While these stocks have delivered marvellous returns and income to investors over the past 12 months, there is a risk that the current attraction of these high-yielding stocks will wane when quantitative easing comes to an end and bond yields rise.“The telecommunication services, gaming, banks and healthcare stocks are all sitting at the top-end of their long-term PE averages and are thus expensive compared to their historical average,” he said.

Mr Whitten said that three alternative income stock names to the banks are Woodside Petroleum, Woolworths and Wotif.com.

“All three stocks returned a significant amount of cash to investors in FY2013 via dividends. Woodside returned 43% of its cashflow to investors, Woolworths returned 46% and Wotif.com returned a very pleasing 84%.

“In addition, Woodside Petroleum and Woolworths continued to invest the remaining balance of their cashflow in their business (57% and 54% respectively) – to provide for future dividends to their shareholders,” Mr Whitten said.

Tyndall AM is an award-winning Australian investment manager, specialising in Australian shares, international shares, Australian fixed interest, international fixed interest and alternative assets.

As at 30 June 2013, Tyndall AM’s investment teams manage approximately A$23 billion in funds on behalf of retail and institutional investors, private clients, superannuation funds and charitable trusts.

Tyndall AM is owned by Nikko Asset Management Co., Ltd. (Nikko AM), a leading asset management company headquartered in Asia, with more than A$169 billion in funds under management (as at 30 June 2013).

The post Look beyond dividend yields for income producing equities appeared first on AdviserVoice.

• Global share markets pushed higher over the last week helped by mostly good economic news, notably this time from China, and the possibility of a diplomatic solution with respect to Syria.
• In Australia, the boost to confidence from the change in Government was evident in higher readings for consumer and business confidence, a rally in the share market and a slight gain in the $A. While other factors also played a role in the share market gain, eg global share markets also rose, confidence has been a missing ingredient in the Australian economy in recent times so if the new Government can maintain higher confidence levels by implementing a program of lower taxes, smaller government and less regulation resulting in a more business friendly environment then it will help drive Australia’s path back to stronger growth. The likelihood that a mix of independents and minor parties to the right of the Coalition will control the balance of power in the Senate increases the chance that the new Government will get its legislative program through Parliament.
• The further surge in the Australian share market pushed the ASX 200 to its highest since June 2008 and the accumulation index (which takes account of capital growth plus dividends) rose above its November 2007 all-time record. While shares are vulnerable to a short term correction, the combination of reasonable valuations, low interest rates and easy money and the anticipation of an upswing in economic growth and profits next year is likely to push the share market up to around 5350-5400 by year end with further gains likely next year.
• In the US, the focus is now turning to Congressional negotiations regarding a new Budget (required by October 1) and an increase in the debt ceiling (required by mid-October). Expect the usual cantankerous argy bargy between both sides of politics to cause bouts of financial market nervousness ahead of the usual last minute deal. With the US budget deficit having fallen to 4% of GDP (from a 2010 peak of above 10%) it will be harder for the Republicans to push too hard without risking alienating the public, which they probably don’t want to do ahead of mid-term elections next year.

Major global economic events and implications

• Chinese data for August was unambiguously positive with stronger exports, industrial production, power generation, retail sales and fixed asset investment, solid growth in money supply and lending and all at the same time that inflation is low. Momentum in China appears to have bottomed and is on track for 7.5% growth this year. This is good for global growth but also provides support for commodity producers like Australia.
• A pickup in exports is also starting to appear in other emerging countries including Korea and India and is consistent with an improvement in broad global growth momentum.
• Meanwhile the problems in parts of the emerging world are a long way from over with Indonesia hiking interest rates yet again to defend the Rupiah and fight inflation, but which will only make the growth outlook worse,
• It was a quiet week on the data front in the US. Weekly jobless claims fell but this was distorted by two states failing to file. Consumer credit was weaker than expected, small business optimism fell very slightly, and weekly mortgage applications fell highlighting the ongoing impact of the rebound mortgage rates that has resulted from the back up in bond yields. US mortgage rates are now running around 4.6% compared to a low in May of 3.4%.
• While Eurozone industrial production fell in July, the rising trend in manufacturing PMIs suggests this is an aberration with the recovery likely to resume.
• Japanese economic data was somewhat messy with June quarter GDP growth revised up to 3.8% annualised and bankruptcies down but mixed readings on business conditions and sentiment.

Australian economic events and implications

• Apart from the poor jobs report, Australian data releases over the last week were positive. The deterioration in the labour market in response to the sub-par growth of the last year was clearly evident in August with jobs falling for the second month in a row and unemployment rising to 5.8% which is just below its post GFC peak. Labour force underutilisation is now at its highest since 2002. Unfortunately, falling job ads and business hiring plans point to a further deterioration ahead. The soft labour market with higher unemployment still to come highlights that the risks for interest rates remain on the downside. However, the labour market is always a lagging indicator and leading indicators released over the past week were more upbeat with a continuing rising trend in housing finance and solid gains in both business and consumer confidence. While the bounce in confidence owes much to the change in Government they are nevertheless welcome news given the important role confidence plays in driving the economy.
• More broadly, four factors have played a role in holding the economy back over the last few years: relatively high interest rates, the high $A, China worries and the political mess. We have now seen relief on all these fronts.

Major market moves

• Share markets had a good week helped by good economic data from China and signs that a diplomatic solution will be found for Syria.
• Commodity prices mostly fell on nervousness ahead of the Fed’s taper decision despite stronger Chinese data.
• The Australian dollar rose helped by a combination of strong data from China and a post-election boost to confidence. The gains were partly reversed though as poor jobs data kept alive the prospect of another rate cut.

What to watch over the next week?

• In the US, we expect the Fed to announce that it will be scaling back its monthly asset purchases from $US85bn to $US75bn. Such a move will hardly come as a surprise as the Fed has been warning of its since May and a September taper has become the market consensus expectation. The softer than expected August jobs report means that such a move is not a done deal, but on balance the run of data released recently suggest that the US economy has picked up pace enough to withstand a lessening in the pace of stimulus. However, because growth is still far from robust the Fed is likely to indicate the pace of quantitative easing will not be reduced in a straight line and that interest rates are unlikely to be hiked until some time in 2015 at the earliest. Its dovish forward guidance is likely to be focussed on pushing back against the recent back up in bond yields. To avoid pressure on mortgage rates it’s also more likely to cut back purchases of bonds as opposed to mortgage backed securities. Finally, it’s worth stressing that tapering its QE program is not the same as a monetary tightening – it will just be equivalent to cutting interest rates at a slower rate.
• On the data front in the US, expect a modest rise in industrial production (Monday), benign inflation (Tuesday), a slight fall back in the NAHB homebuilder conditions index (Tuesday), a further rise in housing starts (Wednesday) but a slight fall in existing home sales (Thursday). Manufacturing surveys for the NY and Philadelphia regions are expected to show continuing strength.
• In Europe, the German Federal election (Sunday 22 September) is most likely to see the return of Angela Merkel as Chancellor with the main uncertainty relating to whether she will lead a coalition with the Free Democrats (as at present) or the Social Democrats (as over 2005-09). Either outcome is unlikely to pose a threat to Germany’s relationship with the rest of the Eurozone and so is unlikely to have significant investment market implications, beyond any initial kneejerk response.
• In Australia, the minutes from the RBA’s last Board meeting (Tuesday) will be watched closely to see whether the explicit easing bias that was removed from the post meeting statement in August, but returned with the August minutes only to be left off from the post meeting statement two weeks ago will be returned again. It would make sense for the RBA to make it clear that it retains an easing bias because it helps maintain downwards pressure on the $A without necessarily having to do anything. A speech by Assistant Governor Malcolm Edey will also be watched for clues regarding interest rates.

Outlook for markets

• After a strong run up, shares are at risk of a short term correction as we go through the seasonally weak period of September/October and given various worries including the Fed’s taper decision, the German election, coming budget and debt ceiling negotiations in the US, the nomination of the next Federal Reserve chairperson and various imbalances in the emerging world and remaining risks involving Syria.
• However, any pullback is likely to be modest and just another bull market correction which should be seen as a buying opportunity as the broad trend in shares is likely to remain up. Valuations remain reasonable, monetary conditions are set to remain easy well into next year, and profits are likely to improve next year as global and Australian growth picks up. So by year end we see further upside in global and Australian shares with gains continuing next year.
• Government bond yields have increased too far too fast and could stabilise or even decline a bit, particularly if the Fed presents dovish forward guidance when it decides to start tapering. However, still low yields and an unwinding of years of massive inflows into bond funds point to poor returns ahead.
• The $A looks to be undergoing a short covering rally which could take it to around $US0.95/96. But once this has run its course and extreme short positions have been unwound the downtrend is likely to resume.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

————————

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending 13 September appeared first on AdviserVoice.

The impact of the federal election on the share market is expected to be minimal.

The Australian share market is likely to experience only a slight rise in volatility in the weeks following the election, according to the S&P/ASX 200 VIX (A-VIX), a tool to monitor the level of near-term volatility in the Australian benchmark equity index.

This also indicates that the market predicts that a share market rally is unlikely.

The level of the A-VIX implies market expectations of volatility in the S&P/ASX 200 over the next 30 days and provides an indicator of investor sentiment.  The A-VIX is currently at 15.628, which is approximately mid-way between the year’s high of 21.675 and low of 10.540.  However, the A-VIX has increased from around 13 to 15.628 over the past two weeks.

Brian Goodman, ASX Product Development Manager said: “Although we have seen the A-VIX rise slightly over the past two weeks it is only nearing the mid-point of the year’s range and so is not at a level considered relatively high.  The A-VIX could be interpreted to indicate that investors are not expecting market volatility to increase significantly over the next 30 days, despite Saturday’s election and current international events.” 

The post Share market expected to remain calm post-election appeared first on AdviserVoice.

• 

  The impact of the federal election on the share market

  Historically election campaigns result in a period of flat lining for the Australian share market followed by a bounce once the election is out of the way.

• The likely end to three years of minority Government should be taken favourably by markets as it will likely result in more certain policy making.

The Federal Election

With the much anticipated Australian Federal election now set for 7 September it is natural to wonder what impact, if any, there might be on investment markets – both in terms of the uncertainty created by the election itself and in terms of the outcome. At present while opinion polls have Labor and the Coalition running at around 50% each on a two party preferred basis, according to bets placed on online betting agency Centrebet the Coalition remains the clear favourite.

The performance of markets around elections

Elections can potentially have a short-term impact on investment markets. This is because investors don’t like the uncertainty associated with the prospect of a change in government during the campaign and then there may be relief once the poll is out of the way and possibly optimism associated with the election of a new Government.

The next chart shows Australian share prices from one year before till six months after Federal elections since 1983. This is shown as an average for all elections (but excludes the 1987 and 2007 elections given the global share crash 3 months after the 1987 election and the start of the global financial crisis in 2007), and the periods around the 1983 and 2007 elections, which saw a change of government to Labor, and the 1996 election, which saw a change of government to the Coalition. The chart suggests some evidence of a period of flat lining in the run up to elections, possibly reflecting investor uncertainty before the poll, followed by a relief rally soon after it is over.

However, the elections when there has been a change of government have seen a mixed picture. Shares rose sharply after the 1983 Labor victory but fell sharply after the 2007 Labor win, with global developments playing a big roll in both. After the 1996 Coalition victory shares were flat to down. The point is that based on the historical experience it’s not obvious that a victory by any one party is best for shares in the short term and, in any case, historically the impact of swings in global share markets arguably played a much bigger role than the outcomes of Federal elections.

What is clear though is that after elections shares tend to rise more than they fall. The next table shows that 8 out of 11 elections since 1983 saw the share market up 3 months later with an average gain of 5.4%, which is above the 1.8% average 3 monthly gain over the whole period.

The next chart shows the same analysis for the Australian dollar. In the six months or so prior to Federal elections there is some evidence the $A experiences a period of softness and choppiness which is consistent with uncertainty about the policy outlook, but the magnitude of change is small – just a few percent. On average, the $A has drifted sideways after elections. While the $A fell soon after the 1983 Labor victory this was due to a policy devaluation in the dying days of the fixed exchange rate system.

The next chart shows the same analysis for Australian bond yields. Interestingly, on average bond yields have drifted down over the six months prior to Federal elections since 1983. The average decline has been around 0.75% which is contrary to what one might expect if there was investor uncertainty regarding the policy outlook. However, the tendency for bond yields to decline ahead of Federal elections appears to be more related to the aftermath of recessions, growth slowdowns and/or falling inflation prior to the 1983, 1984, 1987 and 1993 elections and the secular decline in bond yields through the 1980s and 1990s in general. More broadly, it’s hard to discern any reliable affect on bond yields from Federal elections.

Policy change and shares

Over the post war period shares have had an average return of 12.9% pa under Liberal/National Coalition Governments compared to 9.8% pa under Labor Governments.

Some might argue though that the Labor Governments led by Whitlam in the 1970s and Rudd and Gillard more recently had the misfortune to be affected by severe global bear markets beyond their control and if these periods are excluded the Labor average rises to 14.6% pa. Then again that may be pushing things a bit too far. But certainly the Hawke/Keating government defied conventional perceptions that conservative governments are always better for shares. Over the Hawke/Keating period from 1983 to 1996 Australian shares returned 17.3% pa, the strongest pace for any post war Australian government.

Once in government political parties of either persuasion are usually forced to adopt sensible macro economic policies if they wish to ensure rising living standards. Both the Coalition and Labor agree on the key macro fundamentals – i.e. the need to keep inflation down, to return the budget to surplus and in the benefit of free markets.

Policy differences

The main areas of difference between the two parties of probable economic significance relate to taxation, climate change, government spending & the budget and regulation.

• in terms of tax the Coalition has promised to cut the company tax rate (although for large companies this is partly offset by a paid parental leave scheme) and abolish the mining tax;
• the Coalition is proposing to abolish the carbon tax/Emissions Trading Scheme and will rather pay companies to reduce emissions;
• the Coalition is likely to take a lighter/more business friendly approach to regulation than a Labor government. This may involve some partial wind back of industry regulation; and
• the Coalition will likely try and speed up the return to a budget surplus by cutting government spending, much as it did under John Howard following the 1996 election.

As a result, perceptions that the Coalition will be lower taxing and less focussed on regulation and hence more business friendly than a Labor government may increase the chance a Coalition victory will result in a typical post election share market bounce. However, it’s worth noting that this may be partially offset if it announces aggressive fiscal tightening after the election (given the negative impact this could have on economic growth and profits at a time when the economy is already soft). What’s more if a returned Labor Government follows up on its commitment to a National Competitiveness Agenda working to seriously boost productivity growth then it could have a positive long term impact on growth, profits and ultimately share market returns.

However, it does seem that there is the potential for significant sectoral impacts with the Coalition’s policies likely to be positive for miners, heavy carbon emitters and small companies (due to the company tax rate cut).

Concluding comments

The historical record points to the strong chance of a post election share market bounce. This may also fit in as we move out of the September quarter, which is often the weakest of the year, into the normally strong December quarter, as the profits reporting season ends in Australia and as uncertainty is removed post a possible September decision by the US Federal Reserve to start tapering its monetary stimulus.

Another potential positive from the election is that it is likely to see the end of minority government in Australia as whoever wins is likely to have a clear majority in the House of Reps. This could help usher in a period of more certain and rational policy making. However, it’s not guaranteed as whoever wins may still not have control of the Senate.

– Dr Shane Oliver- Head of Investment Strategy and Chief Economist, AMP Capital

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post The Australian election and investors appeared first on AdviserVoice.

Returns on the rise for shares post-GFC.

Patience has paid off for Australian investors who held on during highs and lows of the market during the Global Financial Crisis (GFC), according to boutique investment research and actuarial consulting company Precept Investment Actuaries.

In a research paper, entitled: ‘Independent Assessment of Historical Australian Share Market Returns over 20 years to 30 June 2013’, Precept Investment Actuaries challenges some pre conceived notions about returns for Australian share market investors.

The in-depth report provides insight into returns – taking into account both share price gains and dividends paid over the period – since the Global Financial Crisis and the implications for future returns.

The main findings of the paper are:

• The average annual long run return on a pre-tax basis over the last 20 years from the Australian share market was 9.6% p.a. excluding franking  benefits and 11.0% including estimated franking benefits.
• The average return of 9.6% over the last 20 years was achieved through an average price gain for shares of 5.2% p.a. and average dividend return of 4.1% p.a. This highlights the often overlooked importance of dividends and franking credits on long term investor returns.
• The Australian share market delivered a return of 22.8% including dividends for the 12 months ending 30 June 2013. This was driven by a rise in share prices of 17.3% for the year together with dividend income of 4.7% excluding franking.
• The 2013 year reflected a favourable sharemarket return of 16.4% for the first 6 months to 31 December 2012 followed by 5.5% for the subsequent six months to 30 June 2013.
• Returns throughout the GFC have been volatile and inferior despite a strong year in 2013. Due to the GFC investors have achieved an average market return of only 2.9% during the last 5 year period from June 2008 to June 2013. However the 20 year average market return is more representative.

According to Mark Hancock of Precept Investment Actuaries, the outlook for future returns remains uncertain. However, based on the last 20 years and even the 10 years prior to that, it would be statistically unlikely to have such another disappointing five year period going forward from 2013 to 2018.

“Future outcomes will depend on a range of factors including: how the global economies unfold from here, how corporate earnings respond and how investors perceive value and growth.

“When you take a step back it is evident that patience has been rewarded for Australian equity investors who experienced the prolonged and adverse period of the GFC,” Mr Hancock added.

Melinda Howes, CEO of the Actuaries Institute said the report reinforces the role modern actuaries play in providing research and analysis across a broad range of organisations and industries.

“As ever, actuaries are uniquely placed to objectively analyse and provide an impartial perspective on a variety of topics through long-term analysis, modelling and scenario planning.”

For a copy of the full paper ‘Independent Assessment of Historical Australian Share Market Returns over 20 years to 30 June 2013’ prepared by Precept Investment Actuaries please contact alice@honnermedia.com.au

The post Patience pays off for investors who rode the GFC market rollercoaster, says Precept Investment Actuaries appeared first on AdviserVoice.