The dominant theme in the global economy during the September quarter continued to be the prospect of the US Federal Reserve's tapering of its stimulus program. With US economic signals still mixed, 'The Fed' surprised markets in September by postponing its monthly $US85 billion bond buying program.
The Fed expressed it was disappointed with the speed of improvement in the job market and downgraded its economic growth forecasts.
China appeared to be emerging from its slowdown, with improvements in retail, industrial output and exports. India, however, found its currency at record lows as inflation soared and growth hit a 10-year low.The Eurozone emerged from a two-year recession, yet its banking system remained weak. While in the UK, The Bank of England upgraded its growth forecasts for the rest of the year.
Australia grew at an annual pace of around 2.5% and unemployment rose to a 4-year high of 5.8%. Mining investment showed signs of peaking, consumer spending remained soft, yet interest rate cuts were beginning to be felt in the housing sector.
The benefits of international diversification were highlighted in the September quarter with divergent performances by Australian, developed and emerging equity markets.
Having lagged the world in the previous quarter, Australia recorded its best quarterly performance in four years. The gain of over 10% doubled that of developed markets broadly and tripled the return from emerging markets.
The Australian market also took encouragement from early indications of a lift in domestic demand as the RBA's rate cuts and lower Australian dollar fed through. This news boosted sectors linked to the economic cycle, like consumer discretionary and industrials. In contrast, the less defensive mood left sectors like healthcare, utilities and REITs lagging.
In Europe, the easing of Eurozone concerns helped fuel strong equity gains by Spain and Italy, while over in the US the market hit record highs after the Federal Reserve decided not to taper its bond buying program.
Emerging markets again slipped behind their developed counterparts, this reflected the ongoing belief of reduced capital flows if the Federal Reserve had tapered its bond buying. There were divergences though; while India and Indonesia underperformed, Korea and Russia had solid gains.
Gold continued its volatile run, racing to an almost yearly high in late August, before erasing virtually all of those gains as it plunged during September.
In fixed interest, term and credit premiums narrowed, again as a result of the Fed's change on tapering. Longer dated bonds outperformed shorter dated, while corporate debt beat government debt.
The randomness of returns chart remained random. Once again it reveals no discernible pattern over the previous three years of quarterly returns, showing there's no better choice than diversification. After a poor June quarter Australian small companies pulled themselves off the canvas this quarter to lead the pack, followed by the Australian large cap sector. Global equities showed more modest returns after a strong June quarter, while Global REITs (the only negative asset class this quarter) finally slipped into the red with a 2.12% loss after seven consecutive quarters of growth.
Investment Strategy Recognised
We've long strived to find the best investment options available. This means ignoring fads and focussing on rigorous research. Currently, much of the investment strategy we implement comes with the benefit of consistent historical data and decades of academic backing.
So it gave us great pleasure recently to see one of the pioneers of that academic research, Eugene Fama, awarded the 2013 Nobel Prize in Economic Sciences. Fama's research is the reason we emphasise the futility of picking stocks and making predictions. It's also the reason we encourage investment discipline over guessing what the market will do next.
"Fama's research at the end of the 1960s and the beginning of the 1970s showed how incredibly difficult it is to beat the market, and how incredibly difficult it is to predict how share prices will develop in a day's or a week's time," said Peter Englund, professor in banking at the Stockholm School of Economics and secretary of the committee that awards the Nobel Prize in Economic Sciences. "That shows that there is no point for the common person to get involved in share analysis. It's much better to invest in a broadly composed portfolio of shares."
She'll be right, mate!
Finally, an interesting comparison of central bankers and possibly cultures. As debate again began to rage over the prospect of low interest rates fuelling a property bubble in Australia, the RBA's Head of Financial Stability, Luci Ellis said the following:
"I think there are a lot of people, the minute housing prices start to pick up they say, 'Oh my goodness, we'll all be rooned.' The minute housing prices start to pick up they imagine it's a bubble."
In contrast, the German Central Bank sounded a note of caution in its monthly report after an 8.25% rise in German property prices over the past three years, saying:
"Housing prices in German cities have been rising so strongly since 2010 that a possible overvaluation cannot be ruled out."
And to give the statements a little context, according to The Economist:
Australian property prices, 46% overvalued against rents and 24% overvalued against incomes.
German property prices, 15% under-priced against rents and 18% under-priced against incomes.
With thanks to DFA Australia.
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