Many happy returns, a turbulent year but giving a fair result

Happy new financial year: two days early, I know, but close enough to take a look at what 2012-13 delivered for investors, and what 2013-14 might bring.

Despite all the ructions, the year that is closing has been positive. The Fed's foreshadowing of monetary tightening trimmed the S&P/ASX 200 share index's gain to 3.4 per cent in the June half year, but in the year to June it rose by almost 19 per cent.

A 12 per cent fall in the value of the Australian dollar since mid-April hurt overseas returns from this market. In US dollar terms, it rose by 9 per cent over the year, and fell by 8 per cent in the June half. Selling by overseas investors looking to avoid those currency losses was one of the things bearing down on the local market in the June quarter.

In America, Wall Street's Dow Jones Industrial Average finished the year about 19 per cent higher.

It outpaced our market in the June half with a 14 per cent rise, and that reflects a couple of things. Resources sector earnings downgrades here that have pushed resources shares in the ASX 200 down by about 8 per cent year-on-year and by almost 20 per cent in the June half. As the year progressed there was also increasing confidence on Wall Street that the US domestic economy was recovering. The Fed's timetable for withdrawing quantitative easing unsettled the consensus but did not destroy it. In Australia, meanwhile, there have been lingering doubts about the ability of the non-resources economy to accelerate as the resources investment boom winds down.

Still, in both markets the rally has brought prices up to fair value rather than pushing them into overvalued territory.

A year ago analysts expected the companies in the ASX 200 index to report combined earnings of $372 a share in the June 2013 year. They have downgraded that forecast to $324 a share by the end of the year, and have cut their forecast of 2013-14 earnings from $414 a share to $357 a share.

There have been industrial company earnings outlook downgrades including ones from Goodman Fielder, AMP and Cochlear but miners and the companies that provide services to them have led the downward charge.

Note, however, that even after the downgrades the ASX 200 universe is tipped to boost earnings by 10 per cent in the year to June that is beginning.

At present market levels the expected earnings of the ASX 200 stable can be bought at a price-earnings multiple of 13.3 times - up from a bargain basement 10.8 times at June 30 last year, but in line with a forward earnings ratio of 13.4 times over the past decade.

There are probably earnings downgrades of about 10 per cent in the pipeline for the mining sector if commodity prices stay where they are, but the $A's decline could generate industrial company earnings upgrades in coming months that counterbalance them.

The US market is also at fair value after its one year ascent.

A year ago, it was valued at 12.3 times expected earnings over the next year. Now it is valued at 13.9 times earnings that are expected to be 11 per cent higher in a year's time. The 10-year average is 14.2 times.

So, overall, here and in the world's biggest market the financial year has seen the sharemarket move from undervalued to fair value.

Essentially, this has been achieved by a reduction of the "cataclysm" share price insurance that investors have been demanding since the global crisis flared in 2008.

Shares are still being discounted for the possibility that the crisis will return, but by less than they were a year ago, as the increase in the earnings multiples of the two markets shows.

In the US, the big question for the new financial year is whether the Fed will undermine economic expansion if it removes quantitative easing that is running at $US85 billion a month by mid-2014.

It certainly does not intend to do that, and since last week's announcement of a timetable for removing QE a steady stream of Fed officials have been emphasising that the QE withdrawal schedule will be extended if economic weakness emerges.

Here investors need to know whether the $A's fall will be entrenched, boosting the competitiveness of the non-mining sector. The odds are that it will, but it will take time to translate into higher domestic industrial earnings.

They need to know if the Reserve Bank will continue to underpin demand and earnings with its cash rate.

The dollar's decline makes cuts below the present rate of 2.75 per cent less likely, and the central bank is expected to sit on its hands when it meets on Tuesday.

While it has risen from 1.6 per cent in June last year to 2.5 per cent inflation is still sitting in the middle of the Reserve's target of 2 per cent to 3 per cent, and rate rises are not on the horizon.

Investors also want reassurance that China's growth is stabilising at about 8 per cent: that is required for commodity prices to stabilise about where they are now, and for selling pressure on the miners to ease. Pressure on interbank liquidity and lending rates in China is this month's focus, but groups with strong trading ties with China including BHP Billiton do not see China's growth collapsing.

Finally, some economic numbers. They do reveal softness outside the resources sector.

Gross domestic product growth expanded by 2.6 per cent in the year to March, but gross national expenditure, which excludes exports, fell in the December and March quarters.

Private sector credit grew by only 3.1 per cent in the year to April, and the Reserve Bank Commodity price index fell from 94.1 in June 2012 to 83.6 in May this year.

Variable home loan rates have fallen from about 6.15 per cent to 5.35 per cent during the year. However, vehicle sales are up about 2 per cent, and retail sales have risen about 3.2 per cent during the year.

Unemployment, a crucial leading indicator of demand, has risen from 5.2 per cent a year ago to 5.6 per cent, and is expected to rise a bit more in coming months.

The jobs environment here is still pretty good by Western world standards. The

jobless rate in America fell from 8.2 per cent to 7.6 per cent between June 2012 and May this year. Unemployment in the euro area has risen from 11.4 per cent to 12.2 per cent over the same time, and unemployment in

Britain has only edged down, 8 per cent to 7.8 per cent.

mmaiden@fairfaxmedia.com.au