A big financial year for shares

The Australian sharemarket has capped off one of its best financial year performances since before the GFC.

Summary: Equity investors have done exceptionally well over the 2013-14 financial year, with the sharemarket delivering a return of more than 19%**. Residential property also has delivered, but at a much lower rate. Yet, with the sharemarket having lost momentum over recent months and property prices having fallen back in some areas, investors should remain alert.
Key take-out: The impact of self-managed super funds on asset prices, particularly blue-chip shares, the sharp rise in IPO activity, a big pick-up in mergers and acquisitions activity, and volatile commodity prices have been some of the big investment themes for this financial year.
Key beneficiaries: General investors. Category: Investment portfolio construction.

The 2013-14 financial year is at last coming to a close today, and it has been one of the best years on record for investing in shares and property.

Amid the seemingly endless search for yield, in 2013-14 the equity market delivered a total return of 19.3%** to investors, while residential property is tracking for a 9.8% gain across the capital cities, though official data is yet to be released..

The return from equities was achieved despite the sharemarket flat-lining over the past eight months – with the All Ordinaries settling after reaching a peak of 5,437 points back in October.

In other assets, gold recovered some momentum after its disastrous slide in 2012-13, government bond yields – against many economists’ expectations – stayed depressed, and the Australian dollar remained stubbornly high even after the official cash rate was lowered to 2.5% from 2.75% last July.

While the returns of riskier assets may have been alluring, it might be prudent to be cautious entering 2014-15. As Adam Carr highlighted on Friday, the weak GDP figures from the US last week point to a potential market correction in the next quarter or two.

Sharemarket

As detailed above, Australian shares have delivered stellar returns to investors in 2013-14, with the All Ordinaries surging 12.7% over the period to today’s close of 5,382 points. When dividends are included, that’s a total return of 19.3%.

However, just about all of those gains were in the first four months. As shown in the graph below, the All Ordinaries Index outperformed the MSCI World Index and the S&P500 until October. Since then it has, for the most part, treaded water, losing ground on the other indices amid the fallout from the federal budget.

Remarkably, the best performer for 2013-14 out of Australia’s top 200 companies was a gold stock. Northern Star (NST), Australia’s second-largest gold producer, has surged 118% over the past year as it boosted gold production by acquiring five gold mines for $100 million off Barrick Gold.

The next best stocks for 2013-14, in respective order, have been nickel miner Western Areas (WSA), pizza company Domino’s Pizza (DMP), mineral explorer Independence Group (IGO) and media company Fairfax Media (FXJ).

Total return

Top five stocks in the S&P/ASX 200

Top five stocks in the All Ordinaries

Northern Star Resources (126%)

LNG Limited (1,380%)

Domino’s Pizza Enterprises (102%)

Mint Wireless (925%)

Western Areas (102%)

Country Road (458%)

Independence Group (98%)

Moko Social Media (375%)

Fairfax Media (94%)

IProperty Group (327%)

But the most notable share price performance has been from Australia’s biggest company. Commonwealth Bank (CBA) shares continued to defy gravity, clambering 20% to above $80 for the first time on record.

Indeed, one of the biggest themes this year has been self-managed super funds distorting influence on asset prices. As Eureka Report wrote at the beginning of this year (see article), investment banks like Credit Suisse have changed their investment strategy to reflect SMSFs’ weight of numbers, saying it has become a dangerous exercise to short the best-yielding stocks.

The other theme that’s back with a vengeance is corporate activity. May followed a strong April to become the biggest month for mergers and acquisitions in three and a half years, with $18.73 billion worth of deals. While June hasn’t climbed to such heights, it has still had the most takeover activity (except for April and May) since September 2012.

The larger takeover battles that have ensued have been over property blue-chip Australand ($3.7 billion), retailer David Jones ($2.1 billion) iron ore and coal explorer Aquila Resources ($629 million) and dairy company Warrnambool Cheese and Butter ($538 million) – a company Eureka Report flagged as a takeover target.

Company floats are also back on the business agenda. In fact, the value of companies listing on the ASX was an astonishing $10.48 billion this financial year – the largest amount since the $13.1 billion in 2006-07.

The largest float of the year was outsourced facility services provider Spotless, which has a market capitalisation of $1.75 billion with today’s closing share price of $1.65 remaining above its offer price of $1.60.

But the most memorable float may be that of online insurance comparison company iSelect, which quickly shred credibility when it missed revenue guidance weeks after listing. Its shares now trade at $1.15, 37.8% lower than its initial issue price of $1.85.

Property

Property investors shouldn’t feel too jealous, given residential property prices are tracking to rise an average of 9.8% across Australia’s five biggest cities during 2013-14, according to RP Data’s daily home value index.

Melbourne and Sydney were where the best gains were to be had during the year. Property prices in Sydney climbed 15% over the past 12 months – pushing over one in four houses in the city to values above $1 million – while prices in Melbourne lifted 9%.

But, as with shares, residential property has lost significant momentum more recently. Last month dwelling values in the combined capitals recorded their first month-on-month fall in a year, dropping 1.9%.

“The month-on-month fall in capital city dwelling values is likely due to part to seasonal phenomenon, but may also be indicative of a broader trend towards cooler housing market conditions,” said Tim Lawless, head of RP Data’s research and analytics team.

That being said, property prices during June appear to have recovered with a more than 1% lift – though official data hasn’t been released yet. This would align with Adam Carr’s view that any slowdown in the property market will be shallow, given the underlying fundamentals remain strong. Further, he says the Reserve Bank would be quick to prevent any major price correction.

Amid the pick-up in property prices, however, rental yields have tapered over the past year. At the end of May the average gross yield in Melbourne was just 3.4%, while in Sydney it was slightly higher at 3.8%.

Commodities

The gold price has endured a volatile year, reaching a peak of $US1,417 an ounce in August late last year before plummeting below $US1,200 an ounce in December. But it has recovered ground over the past six months, and as of today holds above $US1,300 an ounce.

Looking ahead, a sustained slump in the gold price is unlikely, given the agreement by Europe’s central banks to coordinate gold transactions, the turnaround in exchange-traded fund selling pressure and the ongoing interest from other central banks.

Elsewhere, the prospects for iron ore continue to appear gloomy. In the year to date the iron ore price has plunged 30% to $US94.9 a tonne, levels which haven’t been seen since September 2012, as the flood of fresh ore from suppliers hit China’s steel mills.

According to Tim Treadgold, who correctly predicted the iron ore price fall back in October last year, these prices are hurting high-cost producers – even potentially Fortescue Metals Group (FMG).

Conclusion

So what does all this mean for investors? Barring volatility in the commodity space and the stubborn strength in the Australian dollar, 2013-14 has been an excellent year. But, as the latest evidence and trends highlight, such strong capital gains can’t last and investors may want to consider changing their investment strategy.

As Robert Gottliebsen wrote on Friday in How to prepare for 2014-15, investors will need to be vigilant in watching for signs around the world that could cause a correction.

**Originally the article had published the All Ordinaries lifted 14.8% with a total return of 21.5%. The data was based on the closing date of July 1, 2013. When the data is based on the closing date of June 28, 2013, the All Ordinaries rose 12.7% with a total return of 19.3% when dividends are reinvested in the index.

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