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Markets update for September Quarter 2009

The ASX has posted its best quarterly performance since 1987 rewarding those that remained invested throughout the financial stress of 2008 & early 2009. Read about the events of the last quarter in world sharemarkets, interest rates & currency markets and our economic & equity markets overview.

Although it's too early to predict a sustained 'Bull' market, seven consecutive positive monthly returns for Australian equities has been a relief for investors after the Australian share market fell 55% from its November 2007 high to its low on 6 March 2009.

The table below summarises key asset class returns to 30 September 2009. Higher risk asset classes reported the strongest returns in September, including Australian listed property (9.8%), domestic equities (6.3%) and small cap domestic equities (5.1%).

Source: Bloomberg

Australian & International Shares

The Australian sharemarket has posted its best quarterly performance since 1987, amid confidence that the global economy is on the mend thanks to massive government stimulus measures strengthening the banking system and encouraging investors to buy stocks.

The All Ordinaries Index rose 20% over the past quarter, the best such run since the index jumped 27.4% in the September quarter of 1987. Stocks also managed to beat the September curse with the ASX S&P 200 Index rising 5.9% over the month to cap a seven-month winning streak.

With the exception of the Telecoms all the sectors managed to record positive returns during the quarter, with Banks and Financials substantially outperforming the ASX 200.

With the All Ordinaries falling by 55% to a low of 3112 on 6 March 2009, it has now rebounded to be 4739 as at 30 September 2009 representing a 52% rise from the March low.

Source: Yahoo Finance

Since bottoming at a 12 year low on March 9, the key US S&P 500 index has gained 58%, the Dow Jones Industrial Average has risen by 50% and (after hitting a six-year low) the Nasdaq Composite index has surged by 68%.

The MSCI World Index returned double-digit returns during the third quarter of 2009. This is the first time this index has had two consecutive quarters of double-digit returns for 23 years. Early in the quarter the market rally looked to be easing, but results were better than expected and improved signs of economic recovery helped sustain the rally.

Source: RBS, Bloomberg

Interest Rate Markets

Reserve Bank Governor Glenn Stevens said 'the central bank would not keep the cash rate at an "emergency" low of 3% any longer than necessary.' As a result the Reserve Bank of Australia (RBA) raised the official cash rate by 0.25 basis points to 3.25% at their October board meeting.

The RBA cited a number of reasons for the rate rise including; upgraded forecasts for the world economy, increased business and consumer confidence, unemployment rate is not expected to rise as high as first thought, and underlying inflation remains outside the target range of 2-3% p.a.

Updated growth outlooks and suggestions that inflation may not moderate as much as expected have fuelled speculation that the RBA will follow up the October rise with another rate increase next month. Many economists also believe interest rates will return to steadier levels within the next 12 months with the cash rate possibly increasing to 4.75% by this time next year.

The table below shows the current interest rates for the major central banks and the date of the last movement. With rates increasing in October Australia has become the first developed country to lift rates since the Global Financial Crisis hit over 18 months ago. Of the major central banks below, Australia has the only official interest rate above 1%, which is one factor supporting the strength of our dollar.

Currency
Financial Review - 1 October 2009

The Australian dollar broke through US 88 cents on the last day of September after eight consecutive monthly gains to reach its highest point in more than 13 months. A better outlook for the economy and a weaker US dollar helped the Australian dollar surge 5.4% against the greenback last month and 9% over the September quarter - the first time in 26 years that the currency has mounted such a stretch of monthly gains. The currency has soared against the British pound over the past three months. It bought 54.7 pence at the end of September, just below the 24-year high of 54.9p hit in the last week of September 2009.

Much of the Australian dollar's ascent has been based on expectations that the RBA will tighten interest rates ahead of other economies. Higher interest rates make the Australian dollar more attractive to investors because it increases the yield they can earn from holding the currency. Should the RBA raise the cash rate to 4% - 5% by next year, JPMorgan believes such a setting could push the Australian dollar to U S95 cents by the end of next year.

Economic Overview & Equity Market Outlook

The "green shoots" of economic recovery might not exactly be bursting in super-fertilised profusion around the globe, but - depending on from where they are viewed - they are budding if not sprouting.

The star of the global economy is of course China, a nation so important to worldwide recovery, if it did not exist - which it did not as recently as 1980, in the context of the global economy - the rest of us would have to invent it.

China's second-quarter recovery in Gross Domestic Product (GDP) was much better than analysts expected, and helped to spark surprisingly strong growth in important trade-oriented economies such as South Korea and Singapore as well. China's projected growth rate for 2009 of 8% will, in conjunction with India's expected 6% growth, do most of the heavy lifting needed to drag the global recovery back into growth.

It won't, however, be enough to drag the global economy into the black: the global economy is likely to fall by 1.1% this year, before growth resumes in 2010. But it is clear that without the developing economies, the world economy would have taken an even larger hit.

Much of what the global economy is experiencing in 2009 was locked-in when Lehman Brothers collapsed in September 2008. The resultant shocks to the financial markets - and to business and consumer confidence - ensured that 2008/09 would see the largest slump in the global economy since the Second World War, and the worst fall in world trade for eight decades.

From there, the health of the global economy depended on any stimulation that could be applied by governments and central banks, both in terms of interest-rate settings - which have been slashed globally - and fiscal pumping.

And the authorities have done a great deal.

Joe Davis, Vanguard chief economist, says that the USA alone has committed the equivalent of a year's worth of its GDP to address the housing recession, the liquidity crisis and the economic recession. Not only does the magnitude of governments' response to the global financial crisis dwarf reactions to past financial crises, so does the rapidity of the response.

In a typical recovery from recession, sharply rising consumer spending leads to a falling savings rate and increase in private debt, driving the recovery. But this time around - after the scare of the Global Financial Crisis - Davis expects the savings rate to rise, and appetite for debt to fall.

In the short term, these changes in household behaviour are likely to lead to a tepid recovery in the USA in terms of job growth, because consumer spending will not quickly roar back to pre-crisis levels. But Davis says they will be very good for the USA in the long run, because investment will be financed more by domestic savings than foreign funding.

The financial markets have stabilised markedly since the panic stations of the December 2008 quarter. Corporate credit spreads, inter-bank borrowing rates and the spread between bank and government borrowing rates have all narrowed greatly since then.

Benefiting as it does from voracious Chinese demand for raw materials, Australia is the only major Western economy to have avoided recession (defined as two successive quarters of shrinking GDP), with GDP rising by 0.4 per cent in the March quarter, and following that up with a rise of 0.6 per cent in the June quarter - a performance three times higher than the consensus estimate.

Much of the market's restored confidence is due to improving economic news and extraordinary amounts of fiscal and monetary stimulus. Both business and consumer confidence is rising, and the leading indicators point to a rosier outlook. The US Conference Board Leading Economic Indicator Index rose sharply in June, the third consecutive increase in six months; seven of the ten indicators increased in the second quarter. Moreover, durable goods orders have increased in three of the last five months as companies rebuild their inventories.

While these are definitely welcome signs, there is a risk that the stock markets have run too hard, too soon, and are pricing in an extent of corporate earnings recovery that may not eventuate.

Much of this outcome depends on whether the global economic stimulus has merely brought forward demand - which will then tail off as the stimulus wave subsides - and whether the growth in China, in particular, is sustainable, and not simply government-driven.

With just one quarter of 2009 left, investors are certainly entitled to breathe a sigh of relief at the way that economies and markets have reacted over the year so far. But markets have run very strongly, and a short-term pullback may eventuate before they can consolidate their gains.

Remain invested for the long-term

While remaining invested in the market will not protect you from market downturns it does insure you are invested during periods of market growth that invariably follow. For example, $10,000 invested in the Australian sharemarket in 1970 would have grown to $453,165 by the end of June 2009. However, if you missed the single best monthly return of 25.5% it would have cost you $92,109 and reduced your investment to $361,056.

Interestingly the two best monthly returns came in October 1974 and January 1975 after the worst decline since 1900. In 1974 the Australian sharemarket retracted sharply and the economy fell into recession. Under these circumstances many investors might have considered pulling out of the market, but had they done so would have missed a 25.5% rise in a single month.

In contrast to the mid 1970's the current financial crisis has not pulled the economy into sustained negative territory, interest rates are at historic lows and inflation remains within the RBA's target range of 2% - 3%. This paints a positive picture looking forward.

The following graphs assist in placing the financial crisis in perspective and illustrate important trends based on the historical returns of Australian and US equity markets.

Source: ASX, Perennial

The final graph plots the recovery from peak to trough of the last nine bear markets in Australia. It has taken between 15 months and just under eight years for portfolio values to be restored. On average, recovery has taken around three and half years.

Various Bear Market Cycles - (Time to recover losses peak to trough)

Source: ASX, Perennial

Conclusion

The recent market rebound has rewarded individuals who have remained invested throughout the financial stress of 2008 and early 2009. Diversified portfolios and appropriate asset allocations have also reduced the strain on investors.

From the low point of 3112 to the present level of 4739 the index has risen by 52%. But the current level is still 31% lower than its November 2007 high. As such, the Australian sharemarket needs to rally a further 45% from current levels to return to its previous high. If this occurs within 3 years that results in an annualised return of 13.09%, substantially above historical return levels of the Australian share market of around 11% p.a.

Although we remain optimistic that the worst of the financial crisis is over its important that investors remain focused on long term goals which include diversification and regular rebalancing.

Sources: RBS, BT Investment Management, Van Eyk, ANZ Economic & Market Research, Perennial

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