Explaining the last quarter's rollercoaster ride

Hold it! What just happened to the Australian sharemarket in the last quarter of the calendar year? As Eureka Report prepares its final edition of the year, it’s clear that investors can expect volatility in the year ahead. Why? Well, the last six full trading weeks on the ASX in 2013 was a rollercoaster ride, although it seems those who stayed on and didn’t sell off will be rewarded.

In the first two weeks of December, the All Ordinaries index endured a 4.6% slide, which was the worst rout we’ve seen in the local market since the dark days of 2008 when the market fell 6% over the same period.

Thankfully, the very late Santa Rally has lit a spark in the market, triggered by the US Federal Reserve finally putting some clarity around the notion of a taper to quantitative easing (that’s a decision to peel back on its bond buying program), with traders now more confident of the outlook for at least the first quarter of 2014.

But, for serious investors, it’s worth examining just what happened in the soft patch that coloured the market over the last few weeks. What fell … and what does it tell us for the year ahead?

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There are many reasons why our shares forfeited some of their gains over the past month.

1. The Australian dollar fell sharply. The currency has now fallen more than 9% to below 89 cents against the US dollar since mid-October, touching three-year lows when the Fed made its announcement early on Thursday morning. Moreover, some local institutional investors believe the Reserve Bank of Australia’s governor Glenn Stevens is undermining confidence in the local market by openly calling for an Australian dollar that is below $90c.
2. Anxiety had been creeping into the markets ahead of the Fed’s decision. The soft patch experienced on Wall Street had immediate effects on the ASX. Following the Fed’s statement, we now understand the exact quantum of the much-feared ‘taper’ – the central bank’s reduction in bond buying is now quantified at $10 billion less a month to $75 billion.

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3. Several of Australia’s blue-chip stocks have crashed spectacularly after surprising the market with earnings downgrades, creating uncertainty in their sectors. Among the worst performers in a market showing nerves at the end of a volatile year was QBE Insurance (QBE), which nosedived 32% in a two-day rout. This was after its shock profit downgrade, warning of a loss of $250 million when the market was expecting a profit of $US1.1 billion.

Meanwhile our biggest gold company, Newcrest (NCM), which had already disappointed investors with a range of management issues, showed little resistance when a sell-off in gold prices accelerated in the second-half of the year. The company has slumped by 14% to $7.27 over the past month, as gold has plunged to under $US1,200 an ounce mark from around the $US1,300 an ounce level (see Gold in the cold).

4. Other once-favoured small- to medium-sized companies also dotted the market with bad news in December. A good example was a surprise downturn at former market darling Wotif.com, which had a more than 30% sell-off after the online bookings company said profits would drop to between $21.9 million and $22.6 million compared to the previous year’s $27.5 million.
5. Unfortunately for investment banks, and more so for investors, several of the flagship stockmarket floats that rushed to get on the boards in the last quarter of the year have been very disappointing. Indeed, it seems the bigger the float, the bigger the danger. At the time of going to publication, three of the market’s biggest floats – Nine Entertainment (NEC), Dick Smith and the Pratt family’s Pact Group – are trading under their initial public offering price.
6. The banks showed how they can easily drag down the wider market if there is any weakness. Before Thursday’s resurgence, Westpac had fallen 5.6%, Commonwealth Bank had slid 4.6%, and ANZ had declined 3.8%. NAB, which had been a laggard because of its struggling UK operations but has been the best performer this year, was largely spared, edging down 1.9%.
7. Profit taking after a strong year. Calendar year 2013 marked the second consecutive year of double-digit returns from Australia’s sharemarket since before the GFC, and many investors have been taking money off the table ahead of Christmas.

But one might say all’s well that ends well – after a rocky December, we now know where some of the bodies are buried. We have seen some important downgrades; we’ve seen some of the ‘froth’ removed from the market and, in the end, the final returns are looking handsome.

We can expect a price increase of more than 10%, which topped up with dividends should move close to 15%; and, if we include franked credits, it will rise to more than 16 – a very good return in anyone’s books.