Optimism surrounding the wave of positive global economic data and expectations that the US interest rate cycle may be nearing its peak spilled over from November and resulted in global markets performing strongly during the month. For the month of December, the MSCI World ex Australia Index (hedged into $A) rose 2.3%. The MSCI World ex Australia Index (unhedged) rose 3.2% over the same period and outperformed its hedged counterpart, which was a result of the Australian dollar closing down against the US dollar, Japanese Yen and the Trade Weighted Index. Despite this fall, the Australian dollar continues to find support from higher commodity prices and positive real yields, which are offsetting a declining nominal interest rate advantage relative to the US. Within domestic markets, the S&P/ASX 300 rose 3.1% during the month.
Data released during the month revealed that Australian economic growth was flat during the September quarter at +0.2%, largely a consequence of lower inventories and weaker export volumes. This has resulted in a year-on-year Australian economic growth rate of +2.6%. Despite the subdued result in the September quarter, many economists believe that Australian economic growth will rebound in the December quarter, which is broadly supported by the Westpac/Melbourne Institute leading growth index predicting reasonable growth ahead for the Australian economy. Looking at other economic indicators, the unemployment rate remained steady at 5.1% during the month. The Reserve Bank of Australia (RBA) kept interest rates on hold at 5.5% for the ninth consecutive month, with comments from the Chairman of the RBA hinting a mild bias towards tightening monetary policy. Inflation indicators have been relatively benign, but there are ominous signs of wages and core price inflation edging upwards. Within the Australian market, the S&P/ASX 300 rose by 3.1% in December, supported by strong liquidity in the market and healthy corporate earnings. Fuelled by higher resource prices as a result of increased demand for raw materials in China, the best performing sectors for the month was Energy (up 7%) and Materials (up 6%). Information Technology (down 3%) and Consumer Staples (up 0.1%) were the worst performing sectors. |
Globally, the European Central Bank (ECB) lifted its policy rate by 0.25% to 2.25% during December, the first rise in the policy rate in five years. The ECB sighted inflationary concerns as the main reason for tightening monetary policy. The US Federal Reserve has also increased the official Fed Funds rate by 0.25% to 4.25% during the month, which is the thirteenth time since June last year that the Fed has implemented a measured increase in the Fed Funds rate. Elsewhere, there are also murmurs that the Bank of Japan may be contemplating moves to end its zero interest rate policy as a response to domestic spending heating up, signs of deflation subsiding and evidence that recent growth in the Japanese economy will not be shortlived. All this paints a pattern that central banks may be less accommodative in their monetary policies going forward. In other news, data revealed during the month showed US economic growth to be solid, with inflation relatively benign. The European economy is also on the mend with the German IFO business conditions survey and industrial production rising strongly. In China, the most significant news has been the upwards revision (by 17%) of the country’s economy on the back of improved measurement of the services sector. This revision has resulted in China jumping from being the seventh largest economy to being fourth place behind the US, Japan and Germany.
Australian fixed interest as measured by the UBSA Composite All Maturities Bond Index returned 0.9% during the month. Australian bond yields declined across the curve and flattened in December, which was broadly in line with US yields. Global government bonds yields also fell over the month on news that the US Federal Reserve may be close to the end of its interest rate tightening cycle. The decrease in yields lead to a positive return of 1.0% for global fixed interest, as measured by the Lehman Global Aggregate Bond Index (hedged in $A).
The Australian listed property sector posted a strong return during the month, with the S&P /ASX 300 Listed Property Index rising 5.3%. Unlisted property as measured by the Mercer Unlisted Property Index rose 2.5% over the month. |
