Economic & financial perspectives

• 

  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?

The post A good year, or a very good year? appeared first on AdviserVoice.

• The rising tide in favour of the $A has well and truly reversed with further downside likely in the years ahead, particularly against the $US and Euro.
• The commodity price boom has faded in response to a moderation in Chinese growth as commodity supply increases, the US is slowing its quantitative easing program and rate cuts have reduced the attractiveness of the $A all at a time that it remains above levels that offset relatively high costs and prices in Australia. Expect it to fall to around $US0.80 in the next few years.
• For Australian investors, this means less need to hedge global exposures back to Australian dollars.

Introduction

Over the last year the $A has fallen from around $US1.05 to around $US0.89 – a fall of 15%. In fact the $A is down nearly 20% from its 2011 high. The drivers of the slump have been a combination of lower commodity prices; increasing evidence that Australia is not competitive internationally; a deterioration in Australia’s relative growth outlook; falling Australian interest rates; and more recently the Fed’s move to slow down its monetary stimulus. RBA “jawboning” has also helped. Despite periodic bounces, like that in the last few days, our assessment is that more downside lies ahead.

The big secular picture

The big swings in the value of the Australian dollar line up well with key long term swings globally:

• In the 1980s and 1990s the $A fell as commodity prices softened on stronger supply, global investor sentiment shifted in favour of the US and Australia was seen as “old economy”. As a result the $A fell to $US0.48 in 2001.
• In the 2000s the $A surged as commodity prices rose (driven by China and the emerging world and weak commodity supply), the US and Europe hit hard times, Australia was seen as being in good shape and the $US generally fell. The $A peaked in 2011 at $US1.10.
• Now the secular picture is turning again: the US, Europe and Japan seem to be tracing out a renaissance of sorts at a time when parts of the emerging world seems to be running difficulties; slower growth in the emerging world led by China at a time of increased commodity supply is weighing on commodity prices; as a result the $A is trending down as the $US trends back up.

Central to these long term swings as far as the $A is concerned is the commodity super cycle. This is because 70% or so of Australia’s exports are commodity related. Raw material prices over the past century have seen a roughly 10 year secular or long term upswing followed by a 10 to 20 year secular bear market. This can be seen in the next chart.

The upswings are usually driven by a surge in global demand for commodities after a period of mining underinvestment. The downswings come when the pace of demand slows but the supply of commodities picks up in lagged response to the previous price upswing. The last commodity super cycle that got underway around 2000 looks to have run its course. Growth in China remains strong but it has slowed from 10% plus to 7 to 8% at a time when the supply of commodities is surging after record levels of mining investment globally. And a basing in the $US is also not helping as commodities tend to be priced in US dollars.

Just as the upswing in the $A lasted a decade the downswing could last as long. But how far will the $A fall?

Purchasing power parity & hamburgers

A good place to start is with what economists call purchasing power parity, according to which exchange rates should equilibrate the price of a basket of goods and services across countries. A rough guide to this is shown below which shows the $A/$US rate against where it would be if the rate had moved to equilibrate relative consumer price levels between the US and Australia over the last 110 years or so.

Purchasing power parity doesn’t work for extended periods. In fact the commodity super cycle and the key long term global swings noted earlier play a big role in the long term swings in the $A around the level suggested by purchasing power parity, ie rising above it during 1970s, falling below in the 1980s & 1990s before rising back above it into 2011.

However, it does provide a guide to where exchange rates are headed over very long periods of time. A popularised version of purchasing power parity is The Economist magazine’s Big Mac index, which works on the principle that exchange rates should adjust until the Big Mac costs the same in any two countries. Such measures can give different results depending on the estimation period and the types of prices used. Right now after the sharp fall of the past year the Big Mac index suggests the $A is fair value. By contrast the relative consumer price measure used in the chart above suggest the $A is still 15% overvalued, with fair value around $US0.75-0.80. The broader approach also lines up with anecdotes of high prices and labour costs in Australia compared to many other countries. This suggests the $A could at last fall to $US0.80 in the years ahead.

Other drivers

But the last chart above also suggests there is a good chance of an overshoot. Several other factors also point lower for the $A. The major factors on this front are commodity prices, relative monetary policies and changing perceptions of Australia. First, as already noted commodity prices are in a secular downswing.  The chart below shows an index of industrial metal prices against the $A, showing they have gone from a positive influence to a negative.

Second, monetary policies are now working against the $A with the RBA cutting interest rates since late 2011 which has reduced the interest rate differential favouring the $A when the US Fed is slowing its quantitative easing program.

Finally, perceptions of global investors about the $A appear to be changing. Over much of the last decade it was positive reflecting Australia’s favourable fundamentals tied to growth in the emerging world and more latterly as a AAA rated safe haven against turbulence in the US and Europe. Now there is a bit more wariness as emerging markets have gone out of favour and Australia’s budget deficit has deteriorated.

While the RBA appears to have relaxed its efforts at jawboning the $A lower this may simply reflect the extent of the fall that has already occurred. Coming at time when short positions in the $A are extreme the change in the RBA’s stance could see a further short term bounce in the $A as short positions are unwound. However, it doesn’t change our broader assessment that the trend in the $A will be down.

Implications for investors

Changes in the value of the $A can have a big impact on the return Australian based investors receive from international investments. This can be seen in relation to international equity returns in the next table. The first column shows the return from global shares in local currency terms, the second shows the return in Australian dollars (if foreign currency exposures are not hedged back to Australian dollars), the third column shows the difference which is the change in the $A on a weighted basis and the final column shows the return to global shares if hedged back to Australian dollars.

In years when the $A falls like last year it boosts investors’ returns from global shares. But when the $A rises as was the case for much of the 2002 to 2011 period it reduces returns from international shares. As can be seen in the last column the return from global shares when hedged back to Australian dollars is usually a bit higher than the local currency return because investors also receive the difference between Australian and foreign interest rates.

Over the 2001 to 2010 period unhedged international shares lost an average 3% pa whereas hedged international shares returned 5.5% pa. The difference largely reflects the rise in the $A (+6% pa), but also the interest rate differential between Australia and the rest of the world (+2.5% pa).

Most global investments offered by fund managers come with a choice of being unhedged, ie exposed to fluctuations in the value of foreign currencies, or hedged, where the value of the investment is locked back into Australian dollars.

There are essentially three key drivers of the decision to hedge or not when investing offshore:

• The outlook for the $A. When it is rising it is best to be hedged, but best to be unhedged when it is falling.
• Whether an investor is “paid” to hedge or not – this is determined by relative interest rates. Most of the time Australian interest rates are above average global rates so investors are paid to hedge into Australian dollars.
• The diversification benefits of foreign currencies. Having an exposure to foreign currency means not keeping all your “currency eggs” in one basket. At times the $A can be pro-cyclical, rising in good times and falling in bad, so it can smooth out swings in global shares.

Right now the broad trend in the $A remains down and investors are getting “paid” less to hedge as the RBA has cut interest rates (2% pa compared to around 3.5% pa 3 years ago). As a result it makes sense to take advantage of the diversification benefits of other currencies by having a greater unhedged exposure than a decade or so ago.

The one major currency where this may not apply is the Yen where further weakness against the $US is likely.

by Dr Shane Oliver, 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.

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Saxo Bank’s outlook for 2014.

Saxo Bank, parent company of Saxo Capital Markets, the online multi-asset trading and investment specialist, has published its first quarterly insight for 2014 looking across both the macroeconomic environment and individual asset classes.

Global overview

Having maintained world growth at acceptable levels throughout the current crisis, emerging Asia will become the world’s primary weak spot in 2014. Investment in that region has reached a staggering 43% of GDP while growth has fallen to barely 6%; the easy part of the growth cycle is long gone, and some emerging market governments are now proactively trying to slow their economies down. This is not necessarily a bad thing for Asia, which needs to cool off and reconsider its economic model; Europe, however, will be hit by the fallout of the troubles facing its best growth market for exports.

Beyond emerging Asia, Saxo Bank expects the global economy to accelerate from 2% growth in 2013 to 2.8% in 2014. This uptick will be led by the US where private consumption and private investment will prove key drivers, pushing growth close to 3%. Tapering will continue as the economy strengthens, which would imply an exit from QE in the second half of 2014.

The Eurozone is on the mend and likely to see growth move into positive territory of 0.8% in 2014, but the outlook for Germany and particularly France remains bleak, the latter having failed to spur growth outside increases in public spending. The two year decline in inflation across the Eurozone is unlikely to reverse meaningfully this year and the argument for additional ECB easing is valid, most likely through a new LTRO.

Steen Jakobsen, Chief Economist at Saxo Bank, comments: “It’s been a long time since the stars of macro indicators have aligned so perfectly. The good news? This is the beginning of the end of this crisis. The 2014-2015 period will see a transition away from quantitative easing and easy money towards better quality growth and, hopefully, a mandate for real change. The world has become so out of balance that things can only improve from here.”

Equities

Peter Garnry, Head of Equity Strategy, underlines the continuing importance of holding equities to see any meaningful capital growth. The relative repricing between equities and bonds will continue in 2014 as total return in equities relative to bonds remains below the equity risk premium line since 1995. He comments: “Don’t pay any heed to those who say equities are in a bubble. If you really want to make the most of your portfolio in 2014, the biggest risk is not being long enough on risky assets. ”

Saxo Bank forecasts a 10 percent overall rise in global equities over 2014. Its top equity picks for 2014 include General Electric, Microsoft and BNP Paribas.

FX

The market is assuming that the Fed will adopt a slow and steady approach to decreasing purchases, and as such the anticipated path is towards a higher USD. However, if markets lose their nerve the USD strength could shift more prominently against the less liquid G10 and emerging-market currencies rather than the JPY and other majors.

John J. Hardy, Head of FX Strategy, adds: “Q1 will see a concerted effort to wean the FX market off QE. The Eurozone could prove a flashpoint, with the peripheral economies ready to rebel if the ECB doesn’t take stronger steps to expand its balance sheet.”

Saxo Bank’s top FX trading themes for Q1 2014 include long USDCAD, long USDJPY and long GBPNZD.

Commodities

Another tough year lies ahead for commodities, with the risk of even lower prices still a possibility. Demand growth has stabilised as economic growth rates in emerging economies, not least China, have declined.

The energy market will have to deal with the possibility of global crude oil supply exceeding demand for the first time in recent memory, thanks in part to the rise in non-OPEC production, and the average price of Brent crude is likely to move lower towards USD 105/barrel. After 2013 saw gold’s first annual loss in 13 years, Saxo Bank is cautiously optimistic for its prospects later in 2014 after averaging 1,225 USD/oz during the first quarter.

Ole S. Hansen, Head of Commodity Strategy, adds: “Raised growth expectations at the beginning of the year carry the risk that investors will once again become too optimistic about the prospects for higher prices, especially in crude oil and industrial metals. Strong January performances over the past three years could therefore be repeated only to be retracted later in the quarter.”

The post Saxo Bank publishes its investment outlook for Q1 2014 appeared first on AdviserVoice.

Investor Sign posts, week beginning 21 July, 2013

Upcoming economic and financial market events

Australia

July 22: State of the States – CommSec’s quarterly assessment of state/territory economies

July 24: Consumer Price Index (June Qtr) – We expect that prices rose 0.4% to be up 2.4% over the year

Overseas

July 22: US Existing home sales (June) – A modest lift in sales is tipped

July 23: US Home prices (May) – Data from the Federal Housing Finance Agency

July 23: US Richmond Fed index (July) – A key regional survey

July 24: “Flash” manufacturing gauges – Released in US, China and Europe

July 24: US New home sales (June) – Sales are tipped to have lifted by 1.9%

July 25: US Durable goods orders (June) – A modest 0.5% increase is expected

The big picture

• We know that the Aussie dollar has lost altitude in the past couple of months, but how far has it fallen, and how does the decline compare with corrections in the past?
• According to data from Thomson Reuters, the Aussie dollar peaked in April at US105.82c – the highest rate in three months. But in the following three months the Aussie has fallen by 15 per cent, touching US89.98c on July 12 according to the financial newswire.
• That three-month drop was the biggest in almost two years, just short of the 15.3 per cent decline recorded in October 2011 when the currency fell from US110.8c to US93.86c over a same three-month period. To find a larger drop, you actually have to go back to the midst of the Global Financial Crisis in January 2009 when the Aussie slumped almost US17 cents over a three-month period.
• The Reserve Bank believes the latest fall in the Aussie dollar is well over-due. As the chart shows, for the better part of a year the Aussie dollar had broadly trended sideways, holding between US101-106c. But over the same period commodity prices gradually trended lower.
• The break in the traditional link between the Aussie dollar and commodity prices was unusual. The Aussie dollar has always been regarded as a “commodity currency” given Australia’s high reliance on commodities or raw materials for export income.
• In part the Aussie dollar’s relative strength up to April 2013 was due to Australia’s economic out-performance. But in mid April that out-performance was re-assessed as stronger US economic data called into question the need for super-stimulatory US monetary policy settings.
• Interestingly it now appears that the Aussie dollar has fallen too far. If the Reserve Bank agrees and next week’s inflation data is on the high side of expectations, then interest rates will be kept steady at the August Board meeting.
  • In Australia, a quiet week is in prospect for new economic data. However it is a different story in the US with key indicators of housing activity to be released over the week. Also “flash” updates on the health of manufacturing sectors are expected across a raft of countries including China, the US, France and Germany.
  • In Australia, the week kicks off on Monday when CommSec releases its quarterly State of the States report, assessing the relative health of state and territory economies. Overall there are reasons to be encouraged with stronger housing activity occurring in many regions, pointing to a “passing of the baton” from mining investment and engineering construction to home building. The purchase of existing homes and building of new homes both generate significant multiplier effects across the economy.
  • On Tuesday the Bureau of Statistics (ABS) issues a report called Migrant Data Matrices, a report that attempts to pull together in one place “demographic, geographic, socio-economic and collection specific data items.” The information is useful for businesses to try to identify new marketing opportunities.
  • On Wednesday the ABS issues the quarterly inflation report – the Consumer Price index for the June quarter. Given that the economy has been generally treading water over 2013, it would be surprising if the report was to flag any inflationary pressures. Many consumers are reluctant to spend, so businesses are choosing to trim margins to lift sales, rather than adopt a strategy of lifting prices to boost profits and thus compensate for weak sales.
  • Overall we expect that the CPI rose by 0.4 per cent in the June quarter, cutting the annual rate of inflation to 2.4 per cent. And while the underlying price measures probably grew on average by 0.5 per cent in the quarter, up from 0.4 per cent, the annual rate of growth is expected to have eased from 2.4 per cent to 2.3 per cent.
  • The main seasonal boost to the inflation rate will come from the Health group, reflecting increases in private health insurance. But working to push the inflation rate in the other direction will be seasonal declines in domestic holiday travel costs.
  • Also on Wednesday the ABS issues a publication entitled Innovation and Technology Update, June 2013
  • On Thursday the ABS issues its Australian Social Trends report while its Spotlight on National Accountspublication is issued on Friday.
  • In the US, the week kicks off on Monday with data on existing home sales while the Chicago Federal Reserve also releases an activity gauge the same day. Economists tip a small 0.4 per cent lift in sales taking them to an annual rate of 5.2 million.
  • On Tuesday the customary weekly report on chain store sales is issued alongside the home price report from the Federal Housing Finance Agency, and the influential regional activity gauge – the Richmond Fed index. The FHFA calculated that prices rose for the 15^th straight month in April, up 0.7 per cent.
  • On Wednesday in the US, data on new home sales is scheduled for release. In May, sales rose for the third straight month, up by 2.1 per cent to a 476,000 annual rate. Economists are tipping a similar gain in June to a 485,000 annual rate. The weekly data on home loans will also be issued.
  • Also on Wednesday, the Markit organisation issues its “flash” July readings on manufacturing activity across a raft of countries including the US, China and Germany.
  • And on Thursday the weekly estimates of claims for unemployment insurance (jobless claims) are issued together with data on durable goods orders and a gauge on activity in Kansas City published by the district Federal Reserve office. Orders for durable goods (goods lasting three years or more) are expected to have edged 0.5 per cent higher in June.
  • The US profit-reporting season rolls on in the coming week. Around 40 companies are expected to report earnings on Monday with eight of these from the S&P 500 index including Kimberly-Clark, McDonalds and Texas Instruments. On Tuesday around 33 companies from the S&P 500 index are slated to report earnings including Apple, AT&T, United Parcel Service and Freeport McMoRan Copper & Gold. Amongst major companies reporting earnings on Wednesday are Boeing, Caterpillar, E*Trade, Ford, Eli Lilly and PepsiCo. On Thursday Amazon.com is one of the bellwether firms to report earnings together with General Motors, 3M, and Colgate-Palmolive.
  • The Australian profit reporting season kicks off with Australand, Petsec Energy and Aquarius Platinum (Wednesday), OceanaGold (Thursday) and GUD Holdings and Korvest (Friday).
  • There is one event that could define whether the Reserve Bank cuts rates again in August – the Consumer Price Index. So ahead of that event, it is useful to assess market pricing of another rate cut. Before the Reserve Bank Board minutes were released, financial markets assessed that there was a 70 per cent chance of a rate cut. Now that estimate stands at 54 per cent. However looking out over the next six months, the belief is that the Reserve Bank will cut rates again, but just once.

The week ahead

In Australia, a quiet week is in prospect for new economic data. However it is a different story in the US with key indicators of housing activity to be released over the week. Also “flash” updates on the health of manufacturing sectors are expected across a raft of countries including China, the US, France and Germany.

• In Australia, the week kicks off on Monday when CommSec releases its quarterly State of the States report, assessing the relative health of state and territory economies. Overall there are reasons to be encouraged with stronger housing activity occurring in many regions, pointing to a “passing of the baton” from mining investment and engineering construction to home building. The purchase of existing homes and building of new homes both generate significant multiplier effects across the economy.
• On Tuesday the Bureau of Statistics (ABS) issues a report called Migrant Data Matrices, a report that attempts to pull together in one place “demographic, geographic, socio-economic and collection specific data items.” The information is useful for businesses to try to identify new marketing opportunities.
• On Wednesday the ABS issues the quarterly inflation report – the Consumer Price index for the June quarter. Given that the economy has been generally treading water over 2013, it would be surprising if the report was to flag any inflationary pressures. Many consumers are reluctant to spend, so businesses are choosing to trim margins to lift sales, rather than adopt a strategy of lifting prices to boost profits and thus compensate for weak sales.
• Overall we expect that the CPI rose by 0.4 per cent in the June quarter, cutting the annual rate of inflation to 2.4 per cent. And while the underlying price measures probably grew on average by 0.5 per cent in the quarter, up from 0.4 per cent, the annual rate of growth is expected to have eased from 2.4 per cent to 2.3 per cent.
• The main seasonal boost to the inflation rate will come from the Health group, reflecting increases in private health insurance. But working to push the inflation rate in the other direction will be seasonal declines in domestic holiday travel costs.
• Also on Wednesday the ABS issues a publication entitled Innovation and Technology Update, June 2013
• On Thursday the ABS issues its Australian Social Trends report while its Spotlight on National Accountspublication is issued on Friday.
• In the US, the week kicks off on Monday with data on existing home sales while the Chicago Federal Reserve also releases an activity gauge the same day. Economists tip a small 0.4 per cent lift in sales taking them to an annual rate of 5.2 million.
• On Tuesday the customary weekly report on chain store sales is issued alongside the home price report from the Federal Housing Finance Agency, and the influential regional activity gauge – the Richmond Fed index. The FHFA calculated that prices rose for the 15^th straight month in April, up 0.7 per cent.
• On Wednesday in the US, data on new home sales is scheduled for release. In May, sales rose for the third straight month, up by 2.1 per cent to a 476,000 annual rate. Economists are tipping a similar gain in June to a 485,000 annual rate. The weekly data on home loans will also be issued.
• Also on Wednesday, the Markit organisation issues its “flash” July readings on manufacturing activity across a raft of countries including the US, China and Germany.
• And on Thursday the weekly estimates of claims for unemployment insurance (jobless claims) are issued together with data on durable goods orders and a gauge on activity in Kansas City published by the district Federal Reserve office. Orders for durable goods (goods lasting three years or more) are expected to have edged 0.5 per cent higher in June.

Sharemarket, interest rates, currencies & commodities

• The US profit-reporting season rolls on in the coming week. Around 40 companies are expected to report earnings on Monday with eight of these from the S&P 500 index including Kimberly-Clark, McDonalds and Texas Instruments. On Tuesday around 33 companies from the S&P 500 index are slated to report earnings including Apple, AT&T, United Parcel Service and Freeport McMoRan Copper & Gold. Amongst major companies reporting earnings on Wednesday are Boeing, Caterpillar, E*Trade, Ford, Eli Lilly and PepsiCo. On Thursday Amazon.com is one of the bellwether firms to report earnings together with General Motors, 3M, and Colgate-Palmolive.
• The Australian profit reporting season kicks off with Australand, Petsec Energy and Aquarius Platinum (Wednesday), OceanaGold (Thursday) and GUD Holdings and Korvest (Friday).
• There is one event that could define whether the Reserve Bank cuts rates again in August – the Consumer Price Index. So ahead of that event, it is useful to assess market pricing of another rate cut. Before the Reserve Bank Board minutes were released, financial markets assessed that there was a 70 per cent chance of a rate cut. Now that estimate stands at 54 per cent. However looking out over the next six months, the belief is that the Reserve Bank will cut rates again, but just once.

The post Investor Signposts: Week Beginning July 21 2013 appeared first on AdviserVoice.

The value of ASX-listed stocks, as measured by the All Ordinaries Index, fell 2.7% during June 2011. Many other major markets also fell during the month including Hong Kong down 5.4%, the US down 1.8%, the UK down 0.7%, and Singapore down 1.2%. In contrast Japan was up 1.3%. Over the course of financial year 2011 (FY11), the All Ordinaries rose 7.7% following a rise of 9.5% in the previous financial year. Market volatility was slightly lower in FY11 (0.6% average daily movements compared to 0.8% in FY10). The rise in Australian equity valuation lagged behind many other major markets with the US up 28.1%, the UK up 20.9%, Hong Kong up 11.3%, and Singapore up 10.0%. This relative performance, in large part, reflected the strong rise in the Australian dollar over the financial year: 26.0% higher against the US dollar, 14.4% higher against the yen and 6.1% higher against the euro. Market conditions helped underpin continued strong secondary equity market trading and a further increase in initial public offering (IPO) activity during FY11. Secondary capital raising activity remained healthy in FY11, although lower than FY10 and well down on the record levels seen during FY09.

Measures of volatility in the Australian equity market were generally restrained during June:

• Current volatility (as measured by the average daily movement in the All Ordinaries Index) was 0.7% in June (May 0.8%).
• Expected future volatility (as measured by the S&P/ASX 200 VIX) rose on average in June to 19.6(compared to 18.4 in May).

Volatility in US markets (S&P 500 Index) rose sharply in June with average daily movements of 0.9% (0.6% inMay). Expectations of future volatility in the US also rose during June.

The value of daily cash market trading in June was steady compared to the previous month’s performance, with an average traded value of $5.3 billion a day. Activity in interest rate futures contracts continued its upward trend, with trading during the June expiry month in the four main contracts (3 and 10 year bonds, 90 day bank bills, and the 30 day cash rate) creating a daily average record of 525,536 interest rate futures contracts traded.

Listings and capital raisings

• In June 2011 there were 13 new listings, 63% higher than the 8 in the previous corresponding period (pcp). There were 160 new listings in FY11, up 72% on 93 in FY10.
• Total listed entities at the end of June 2011 were 2,247, up 3% on the 2,192 a year ago.
• There was $3.3 billion of initial capital raised in June 2011, compared to $226 million in the pcp.
• Secondary capital raisings in June 2011 increased slightly, with $1.6 billion raised, compared to $1.5 billion in the pcp. There was also $1.1 billion of other capital raised, including scrip-for-scrip, in June 2011.
• Total capital raised in June 2011 amounted to $4.9 billion, up 186% on the $1.7 billion raised in the pcp.
• For FY11, total capital raised is down 18% on FY10, with capital raised from IPOs $29.4 billion and from secondary raisings $33.7 billion.

Trading – Cash markets (including equities, interest rates and warrants trades)

The All Ordinaries Index closed at the end of June at 4659.8 points, a fall of 2.7% over the course of the month. Theindex has fallen 3.9% in the calendar year-to-date but was 7.7% higher than a year ago.

• Total cash market trades for June 2011 were 12.8 million, up 8% on the pcp. Total trades for FY11 were 144.3million, up 9% on the pcp.
• Average daily trades for June 2011 of 610,193 were 8% higher than the pcp. Average daily trades for FY11 were570,440, up 9% on the pcp.
• Total cash market traded value was $111.2 billion in June 2011, up 2% on the pcp. The average daily value traded was $5.3 billion in June 2011, also up 2% on the pcp. Total value traded for FY11 was $1.3 trillion, down 1% on the pcp, corresponding to an average daily value of $5.3 billion, down 1% on the pcp.
• In June 2011 the average value per trade was $8,681, down 6% on the pcp of $9,266. The percentage of traded value crossed was 24% (28% pcp).

Trading – Financial derivatives markets

• There was a continuation of very strong trading activity in the benchmark interest rate contracts in June (an expiry month), including record monthly volume in:
  • 30 day cash rate futures (885,640 contracts), 8% higher than the previous record set in May 2011.
  • 90 day bank bill futures (2,879,948 contracts), 7% higher than the previous record set in August 2007.
  • 3 year treasury bond futures (5,365,381 contracts), 15% higher than the previous record set in March 2011.
• Volatility in the short end of the yield curve drove activity in the 30 day interbank futures and 90 day bank bill futures as the market’s view on future changes in the official cash rate by the RBA changed. At the beginning of the month, market expectations were for another 25 basis points increase in the official cash rate by mid next year. However,with economic data signalling a weaker domestic economy and concerns over the euro debt crisis deepening,market expectations turned to the probability of a rate cut in the second half of 2011.
• Equity derivatives volume (excluding the ASX SPI 200) for June 2011 was 16.2 million contracts. Measuring volumes on the prior contract size in order to allow for a meaningful comparison, results in equity derivatives volume (excluding the ASX SPI 200) for June 2011 of 2.5 million contracts. This represents a 26% increase in total volumes compared to the pcp, with a daily average of 118,559 contracts, up 26% on pcp. Total volumes for FY11(based on the prior contract size) were 23.1 million contracts corresponding to an average daily volume of 91,495contracts, both up 7% on the pcp.
• Total futures and options on futures contracts volume (excluding equity derivatives and CFDs) for June 2011 was a record 13.6 million, up 71% on the pcp, with a notional value of $6.6 trillion. Average daily contracts volume during June 2011 of 616,781 was also up 71% on the pcp. Total volumes for FY11 were a record 98.0 million contracts,corresponding to an average daily volume of 382,687 contracts, both up 29% on the pcp.
• A total of 5,937 ASX CFD trades were transacted in June 2011, comprising a volume of 15.3 million contracts. The total notional value of all CFD trades for June was $204.2 million, a decrease of 26% on the pcp, while the value of CFD open interest at the end of June was $87.1 million, a decrease of 27% on the pcp. Total ASX CFD trades in FY11 were 92,905, down 25% on FY10, comprising 176.5 million contracts, up 15%, and with a notional value of $3.5 billion, down 4%.

Trading – Energy and agricultural derivatives markets

• A total of 10,776 Australian electricity futures and options contracts were traded in June 2011, a decrease of 28% on the pcp. Total open interest was 46,360 contracts at the end of June 2011.
• The ASX grain futures and options market traded 33,518 contracts (670,360 tonnes) during the month, up 42% on the pcp. Open interest at the end of June 2011 of 108,774 futures contracts represents 2.17 million tonnes of Australian grain and oilseed. The total volume traded for FY11 was 483,273 contracts (9,665,460 tonnes), a record year representing 24% growth on FY10.

ASX CLEARING CORPORATION

Clearing

All on-market trades (equities and derivatives markets) are novated by ASX’s two central counterparty clearing subsidiaries, ASX Clear and ASX Clear (Futures), which act as counterparties to those trades and replace bilateral counterparty exposures.

• Total margins (including additional margins held against stress testing exposures and concentrated large positions)averaged $3.0 billion during June 2011 (including excess cash collateral but excluding equity securities lodged in excess of the margin requirement), with cash margins lodged averaging $2.5 billion.
• There were intra-day margin calls made on four separate days in June 2011 totalling $4.6 million compared to $2.9million of intra-day margin calls in May 2011.

ASX SETTLEMENT CORPORATION

ASX Settlement

There were no disruptions to the completion of batch settlement in the equities market during June 2011.

• Total equity settlement delivery fail rate averaged 0.65% per day during June 2011, a small increase on the 0.5% rate for May 2011.

Austraclear Settlement

There were no disruptions to the Austraclear settlement sessions during June 2011.

• The levels of total debt holdings in Austraclear decreased over the course of June by $14.7 billion to $1.2 trillion. During June electronic certificates of deposit decreased by $6.9 billion, treasury bonds decreased by $5.1 billion,semi-government bonds decreased by $3.6 billion and corporate bonds decreased by $3.5 billion. Treasury notes increased by $4.3 billion and all other holdings increased by $0.1 billion in total in June.

A separate ASX Compliance activity report for June 2011 has also been released today.

The post ASX Group Monthly Activity Report – June 2011 appeared first on AdviserVoice.

Australian Institutional Specialist Hired to Head Sydney Office

The Sydney office will be managed by Australian Ian Webber, Director, Institutional Investments (Australia & New Zealand), who joined Artio Global in June of 2011. Mr. Webber has extensive experience providing investment solutions to institutions, most recently as Co-Head of Australia/Head of Sales and Marketing for AXA Rosenberg Investment Management. He also served as Director, Institutional Business for Salomon Smith Barney/Citigroup Asset Management. He holds a Graduate Diploma in Applied Finance and Investment from the Securities Institute of Australia and a Bachelor of Economics from the University of Newcastle.
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Tony Williams, Chief Operating Officer of Artio Global said, “We believe that we offer a well-differentiated and compelling perspective on global investing that will resonate with Australian investors. Ian’s background and experience working with local institutions provides a strong base for us to make inroads into this important market.”
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Artio has offices in New York, Los Angeles, Toronto and London. The Sydney office will be part of the firm’s strategy to increase its distribution into Asia. “We have been looking to expand our global network and Australia, with its appetite for a variety of strategies and large pool of superannuation capital is a logical early opportunity,” concluded Mr. Pell.

For more information, please visit www.artioglobal.com.

The post Artio Global Investors Selects Australia for Global Expansion appeared first on AdviserVoice.

• Australia’s trade surplus widened by $716 million to $2,333 million in May – a seven month high. Exports rose 3.2 per cent with imports up 0.4 per cent.
• The trade surplus with broader China (China and Hong Kong) has risen from $10.3 billion to $25 billion in the space of a year. The increased surplus is the equivalent of $650 for every man, woman and child in Australia.
• The Performance of Services index fell by 1.4 points to 48.5 in June. The sector has been contracting for 12 out of the last 14 months. Sales expanded at a slower pace while new orders recorded a modest improvement. Both input and selling prices fell in the month.

What does it all mean?

• The economy may be going through a soft patch but the dollars keep rolling in. The impact of the natural disasters on the trade balance is all but finished and Australia is again paying its way in the world. Australia has now notched up a total trade surplus in excess of $26 billion over the past 14 months. Despite the boost to Australian coffers the impact has yet to have a resounding effect on the economy. The weakness in business and consumer spending suggests the additional income is being saved rather than spent.
• However, as the Reserve Bank has highlighted, increased savings will eventually mean a pickup in spending down the track. It is the multiplier effect that essentially the Reserve Bank is banking on to spur domestic growth over the coming year. At present the additional income is not being spent, but as the recovery gains traction it is likely that Australian businesses and consumers will follow through on spending and investment plans.
• Higher commodity prices and increased demand for coal and iron ore has helped insulate the Australian economy in the near term and will be the catalyst for the robust 4½ per cent growth that the Reserve Bank is anticipating over the current financial year.
• Interestingly Australia is now as reliant on China as it was on Japan in the late 1980s. The trade surplus with broader China (China and Hong Kong) has risen from $10.3 billion to $25 billion in a space of a year- and it is still rising. The increase in the surplus is the equivalent of $650 for every man, woman and child in Australia. If the money was handed out to households chances are that it would be spent, but at present the dollars are heading back to mining companies and being paid out in wages, bonuses, tax, and dividends. For most Australians the effect will be felt in superannuation returns over the years to come.
• Australia is now as reliant on China as it was on Japan in the late 1980s. And it is still early days. While we will ride China’s successes in coming years we are also vulnerable to its stumbles.
• The data last Friday highlighted a surprising improvement in the manufacturing sector (from a level of substantial weakness) however there is no such turnaround taking place in the service sector. The services sector has contracted for 10 months out of the past year and there is no real catalyst to suggest a turnaround.
• There are a couple of factors driving the weakness in the services sector including higher interest rates, a stronger currency and the conservative buying behaviour of consumers and businesses.
• Businesses are under substantial pressure at present with costs edging higher and consumers driving hard bargains. Business margins are constrained, thus depressing profitability. On an encouraging note the forward looking index of new orders recorded is back in expansionary mode and holding at 8-month highs. However it is still early days and a period of interest rate stability would clearly help the situation. If the Reserve Bank stayed on the interest rate sidelines over the next couple of months, activity levels should improve.

What do the figures show?

• Australia’s trade surplus widened by $716 million to $2,333 million in May.
• Exports of goods and services rose by 3.2 per cent while imports of goods and services rose by 0.4 per cent. Exports are up 5.7 per cent on a year ago while imports are up 8.1 per cent.
• Rural exports rose by 6.4 per cent in May while non-rural exports rose by 0.6 per cent.
• Within imports, consumer imports rose by 4.0 per cent in May. Capital goods imports fell by 7.7 per cent while intermediate goods imports rose by 1.8 per cent.
• Consumer goods imports are down 5.1 per cent on a year ago but capital goods are down 3.6 per cent and intermediate goods are up by 18.6 per cent.
• The trade surplus with broader China (China and Hong Kong) has risen from $10.3 billion to $25 billion in the space of a year – a lift in the surplus that is the equivalent of $650 for every man women and child in Australia.

Performance of Services

• The Performance of Services index fell by 1.4 points in June to 48.5. The sector has been contracting for 12 out of the last 14 months. The key 50.0 level separates expansion from contraction.
• Four of the nine sub sectors expanded in the month – unchanged from the previous month. Sales expanded at a slower pace while new orders recorded a modest improvement. Both input and selling prices fell in the month.

What is the importance of the economic data?

• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.
• The Performance of Services index is released by Australian Industry Group and the Commonwealth Bank each month. The PSI is designed to provide a guide to conditions in retail, financial and other service sectors.

What are the implications for interest rates and investors?

• Not surprisingly the strength of the Australian dollar continues to have a detrimental impact on the services sector. Australia’s notched up a record $973 million services deficit in May. It was the 16^th consecutive services deficit and clearly highlights why the services sector has been contracting in recent times.

• No doubt the strength of the currency is making Australia a less attractive destination for overseas tourists and potential international students. Interestingly when the Aussie fell below US70c in 2009 the services sector notched up a series of surpluses.

The post Trade surplus hits seven month high appeared first on AdviserVoice.

The big picture

• Our central view is that the US economy is undergoing a mid-cycle pause and that growth will start to lift again late in 2011. As such, we believe that the Federal Reserve won’t provide additional monetary stimulus and will in fact start to withdraw the stimulus in early 2012. The gradual withdrawal of stimulus is expected to translate to a firmer greenback over 2012.
• We tip the Aussie dollar to ease from US104 cents at the end of 2011 to US102 cents by March 2012 and US97cents by June 2012. The Aussie is also expected to ease from 70.75 Euro cents in December 2011 to 70.30 Eurocents in June 2012.
• The weaker Australian dollar should cause foreign investors to become more positive about the Australian sharemarket. Around 40 per cent of all our listed shares are owned by foreign investors, so the stronger Aussie dollar caused some investors to become overweight Australian shares, prompting some to lessen their exposure. In the March quarter foreign investors sold $1.9 billion of Aussie shares – the first fall in just over eight years.
• But while a weaker currency should improve interest in Aussie shares, other factors such as proposed taxes on carbon emissions and mining profits, as well as a potential ban on the live animal trade, may also serve to restrain interest by foreign investors.
• Valuations on the Australian sharemarket remain broadly favourable. Currently share prices stand at 13.6 times historic earnings – below the long-term P/E ratio of 15. At face value the sharemarket appears cheap, but given investor preference for liquid investments such as cash and bank deposits, it may actually just be regarded as fairly valued in these more conservative times. CommSec expects the ASX 200/All Ordinaries to end 2011 at 5,000 before lifting to 5,500 points by the end of 2012.
• Shares are expected to out-perform other asset classes over 2011/12. Returns on residential property are expected to remain modest at 0-3 per cent given that supply and demand for property has become more balanced. Cash is expected to provide returns of around 5 per cent over the coming year with Government bonds also earning close to 5 per cent.
• The $64 question is when will the “new conservatism” come to an end. Unfortunately no one has the answer. We expect cash to rise from 4.75 per cent to around 5.25 per cent over the coming year. However, just like 2010/11,the risk is that “new conservatism” results in rates remaining stable for longer

The week ahead

• A busy week lies ahead in terms of domestic economic data with a Reserve Bank interest rate decision thrown in for good measure. In the US, the spotlight shines brightly on Friday’s jobs data.
• In Australia, the first full week of the new financial year begins with a barrage of economic data. On Monday, data on job advertisements is released together with the TD Securities/Melbourne Institute inflation gauge, retail trade and building approvals data.
• We expect that retail trade rose by 0.6 per cent in May with the colder weather providing a spur to seasonal purchases. Building approvals are expected to have risen by 3 per cent in May, but approvals are up one month and down the next, so little should be read into the gain. The other data is also worth watching. Job ads fell in May while underlying inflation fell to near 6½ year lows. If the June readings produce similar results, the Reserve Bank won’t be in any rush to lift rates.
• The Reserve Bank Board meets to decide interest rate settings on Tuesday with the monthly trade figures and Performance of Services index released the same day. No change in rate settings is expected or justified. The next big test for most analysts is the June quarter inflation data to be released on July 27.• In terms of the economic data, the Performance of Services index was below 50 in May, pointing to a contraction of activity across the sector. Another weak reading would further water down the chances of a rate hike in coming months. And the trade surplus may have expanded to $1.7 billion in May.
• Data on engineering construction is released on Wednesday while the June jobs report is issued on Thursday. We expect that employment grew by 15,000 people in the month – largely in line with the number of new entrants. As a result, the jobless rate probably remained unchanged at 4.9 per cent. Over the past two months, full-time positions have been cut by almost 80,000, and another fall in jobs in June would raise doubts about the fundamental health of the economy.
• In the US, markets are closed for the Independence Day holiday on Monday. On Tuesday, data on factory orders is released, while the ISM services sector index is issued on Wednesday alongside the Challenger job lay-off series. Economists believe that the services sector is still growing – a reading above 50 is expected – but the index probably eased from 54.6 to 54.3 in June.
• The ADP survey of private sector employment is released on Thursday while the non-farm payrolls (employment) report is issued on Friday alongside figures on consumer credit and wholesale inventories.
• Economists tip a modest 60,000 lift in the ADP survey and then project a modest 90,000 lift in non-farm payrolls. But whichever way you cut it, job gains are modest. The unemployment rate is tipped to remain high near 9.0 percent, albeit down from 9.1 per cent in May.
• The European Central Bank and Bank of England have rate-setting meetings on Thursday.

Sharemarket

• It may not seem like it, but the sharemarket had one of its least volatile years during 2010/11. Over the past financial year, there were just 56 trading days where the All Ordinaries either rose or fell by more than one percent. In fact it was the least volatile 12-month period in almost four years.
• Looking back over the past 15 years, on average the sharemarket has risen or fallen by more than one percent on 63 days in a year, or around once every 4-5 days. No surprises for the most volatile period – it was the time of the global financial crisis. Over the year to January 2009, the All Ordinaries moved up or down by more than a percent on 163 days or around two in every three days. The least volatile period was the year to January 2005 when there were just nine days where the sharemarket rose or fell by more than one per cent.

Interest rates, currencies & commodities

• The past year has been the most stable year for interest rate changes in six years – since 2004/05. Contrary to the forecasts of most private sector economists, the Reserve Bank hasn’t had to lift rates more than once over the financial year as a slowdown in non-mining sectors together with the effects of floods and cyclone have offset solid growth in the resources sector. The only rate change was a 25 basis point increase delivered on November 3. The last time there was just one rate change in a financial year was 2004/05 when rates rose 25 basis points on March 2 2005. That was the only official rate change between January 2004 and April 2006.
• Interestingly, financial markets have again changed their view on the next move in rates. In five months time, the cash rate is tipped to be at 4.70 per cent – or below the current 4.75 per cent cash rate. In other words, financial markets have priced in a 20 per cent chance of a rate hike late this year.
• Over the past year the Aussie dollar has held between US83.14 cents and US110.11 cents – a range of almost US27 cents or a 32 per cent movement between the highs and lows. It sounds a lot, but is this normal? Over the2 7½ years since the currency floated, the Aussie dollar has moved on average by US13.6 cents over a year, or a change of around 21 per cent. The 2010/11 financial year was actually the second most volatile year on record behind 2008/09 (range of US38.45 cents).

The post Investor Signposts: Week Beginning July 3 2011 appeared first on AdviserVoice.

However unlike the US or Europe, the growth of these investment vehicles in the local market has been largely driven by retail investors, with most institutional investors seemingly reluctant to get on board.

A research paper by Russell Investments considers whether the Australian ETF market will start to develop in line with global trends and explores current perceptions and uses of ETFs with an institutional portfolio.

Click to view a full copy of the Russell Investments paper: Research – Institutional ETF Investing in Australia

The post Digging Deeper: Institutional ETF investment in Australia appeared first on AdviserVoice.

With a 3% share of net flows for the quarter, this is the first time that All Star Funds, which launched in July 2007, has participated in the Plan For Life survey.  The increase in net flows from the previous quarter was 56%, placing All Star Funds in 9^th place overall, which is, according to Mulligan, “a great start”.

Mulligan believes that this reflects two key attributes:

1. The high quality of investment managers in the All Star stable, which have delivered strong performance to investors, and
2. The commitment and support of financial planners, who need to be confident in recommending investment products to their clients that the products will deliver on their value proposition.

All Star Funds was conceived to provide consistent high alpha asset management capabilities to investors which would otherwise not be available to them in the retail market.

“When we select a manager, we look for consistent out-performance, irrespective of market cycle,” said Mulligan, “for example, Greg (Matthews, portfolio manager of the All Star IAM Australian Share Fund) and his team have a long-standing track record as a top performing Australian share manager; he and some of his team have worked together for over 15 years.”

The All Star IAM Australian Share Fund has delivered in excess of 4% net above benchmark on an annualised basis since inception (performance data to end April 2011), and is ranked number one or two across most time periods in the latest Morningstar survey (Australian shares sector specialist funds, April 2011 Morningstar survey).

The Fund’s stable-mate, the All Star KFM Income Fund, has also fared well through the liquidity crisis during the GFC and recent natural disasters, according to Mulligan, “delivering a high yield and a strong dividend stream with complete liquidity”.

This Fund is managed by Kaplan Funds Management, an absolute return manager focussed on income producing strategies, which was established in 1998.

In Mulligan’s view, All Star’s success has been driven in part by its focus on supporting financial planners and also by recognising the need for Fund Managers to offer products which deliver on their promise, and so create a trusted relationship with investors and their advisers. To this end, Mulligan believes that advisers need products which deliver solid and consistent results, and deliver on their stated objectives.
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“The support planners have given, and continue to give to the All Star Funds validates our manager selection process,” said Mulligan, “as long as they’re giving us that support, I know our Funds are delivering for them and for their clients.”
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The All Star Nomura China Fund presents a risk-controlled opportunity for investment in China. It is managed by Nomura Asset Management, a conservative manager with proven expertise in this market.
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The All Star Maple-Brown Abbott Listed Property Fund provides access to a high quality listed property capability and is the first time this capability has been offered to the Australian Retail market. The strategy has been managed by Maple-Brown Abbott for over 25 years with a consistent track record of performance delivery.
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Click to download a pdf copy of Plan For Life – Marketer view

Click to download a pdf copy of Plan for Life – Adminstrator view

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