Raise your glass to 2013
Investors are being well compensated for their confidence, John Collett writes.
Barring any shocks over the next couple of weeks, 2013 will turn out to be one of the most rewarding years for investors since the global financial crisis. Share prices have surged ahead, property has moved higher, the cash rate has fallen and mortgage interest rates now begin, in most cases, with a 5.
Retirement savings have continued upwards to more than recover from the losses of the financial crisis. Most people's super savings are in a balanced investment option. SuperRating's data shows the median-performing balanced investment option returned just under 17 per cent for the year to October 31.
The Reserve Bank cut interest rates in May and again in August, which helped lift the performance of the Australian sharemarket. Savers will be disappointed term deposits are paying less than 4 per ent. It is one of the reasons investors have been piling into higher-yielding shares, such as those of the big banks, Telstra and others which, after franking credits, are paying almost twice as much as term deposits.
Concerns were raised that the share prices of the big banks were entering bubble territory. Later in the year, the bubble fear was extended to house prices, as residential markets, particularly in Sydney, surged. The decisive outcome of the federal election on September 7 helped the sharemarket throughout September.
The fall in the value of the Australian dollar since May, as the boom in commodity prices fades, is helping the Australian economy, although the economy remains weak and unemployment is rising.
"There is broad-based confidence now that the US economy is back on to a sustained footing," says the head of investment markets research at Perpetual Investments, Matthew Sherwood.
The United States economy might make up less of the world economy than it once did, but it is still the most important.
"The US economy is strengthening and cheap interest rates have healed a lot of the wounds that have been evident in America's banking sector, housing sector and the government sector," Sherwood says.
But US debt-ceiling negotiations flared again in October. The Republican Party was holding up the passage of law in Congress that would allow the Obama administration to increase the amount it can borrow. If the debt ceiling was not increased by the deadline, the US government would eventually default on the interest it pays on US treasuries - the bedrock of the world economy. Commentators said a default in interest payments would have a similar effect on world markets as the collapse of US investment bank Lehman Brothers five years ago that marked the beginning of the financial crisis. At the eleventh hour, Congress resolved the issue, at least until next month, when the agreement ends.
Apart from the US debt ceiling, there were no problems overseas that could have affected Australian investors, says the chief economist at AMP Capital Investors, Shane Oliver. There was an inconclusive election in Italy in February that put a cloud over continued economic reforms there, but overall, the rest of the world has been benign for Australian investors.
A hard landing for the Chinese economy appears to have been avoided and Japan's economy is doing better, Oliver says.
After cutting interest rates by 1.25 percentage points during 2012, the Reserve Bank has cut rates by a further 0.5 percentage points so far this year to 2.5 per cent, the lowest in 53 years. With interest rates on term deposits of less than 4 per cent, it is little wonder investors have been buying the shares of the big banks and Telstra. Even though the share prices of these companies have been driven higher during the year, their shares can still be bought on yields, after franking credits, of almost 7 per cent and more.
So far this year, Australian shares, including dividends, are up more than 19 per cent. While that is a strong performance, the market is still only a little above its long-term valuation, Oliver says. "Valuations are still fairly reasonable."
House prices have risen this year. According to the RP Data, Sydney dwelling prices are 13 per cent higher over the past 12 months. Melbourne prices are almost 7 per cent higher, with the five capital city index up more than 8 per cent.
The property price rises follow several years of flat prices and prices do not appear to be in bubble territory, Oliver says.
In October, Reserve Bank governor Glenn Stevens played down concerns about a possible bubble in house prices. However, he did caution borrowers and lenders against getting too carried away.
Standard variable mortgage rates of the big banks are about 5.8 per cent, while their three-year fixed rates are about 5.2 per cent to 5.4 per cent. Three-year fixed rates from smaller lenders are just under 5 per cent.
A feature of the second half of the year has been the return of companies floating on the sharemarkets. Since the onset of the financial crisis, the flow of companies floating on the sharemarkets has been a trickle, but the strongly performing sharemarket has triggered a big lift in the number of companies coming on to the market. There have been some lacklustre floats, but OzForex, the currency transfer business, hit the sharemarket boards in style. It had a $2 initial offering price and finished its first day of trade 30 per cent higher.
Lower Australian dollar
As the commodity price boom fades, the value of the Australian dollar against the US dollar fell during the second half of the year.
At the start of the year, $A1 was worth about $US1.05. Now, it is worth just over 90¢. A falling Australian dollar boosts returns from overseas investments.
US share prices are up about 30 per cent so far this year. International shares have produced a return, including dividends, of 40 per cent, in Australian dollar terms.
The lower Australian dollar is helping to rebalance the economy as the peak in the mining boom passes. A lower dollar makes holidays in Australia cheaper for tourists from overseas and Australia more attractive for foreign students. It also helps exporters such as manufacturers.
Home building is increasing to meet higher demand and is restraining the growth in home prices, says the chief economist at CommSec, Craig James. The flow-on effects of home building also help the broader economy.
National Australia Bank group chief economist Alan Oster expects another interest rate cut in the middle of next year, which should be the end of the rate-cutting cycle. A cloud on the horizon is higher unemployment. Oster expects joblessness to rise from about 5.75 per cent now to about 6.5 per cent by the end of next year.
$AU v $US: Parity a thing of the past
All Ords: Shares on the rise
Cash rate: Staying at records lows, for now
RP Data House Price Index: Property soaring
Watch John Collett and David Potts discuss the events of the past year at
The year that was
The year opened with the US Congress fighting over the passage of the federal budget. The "fiscal cliff", which would have meant automatic cuts to government spending and increases in taxes, was averted at the last minute.
An inconclusive election in Italy created uncertainty whether it would continue with economic reforms.
The December-half profit reporting season of Australian-listed companies was better than expected.
The Gillard government announced the May budget would include increases in how much could be salary sacrificed in superannuation by older Australians. A $35,000 cap, instead of $25,000, applies for the 2013-14 financial year for those 60 and over. The higher cap will apply to those 50 and over from the 2014-15 financial year.
The Reserve Bank of Australia cut interest rates by 0.25 percentage points to 2.75 per cent.
Hungarian-American investor George Soros, right, was rumoured to have made about $US60 million ($66 million) by betting the Australian dollar would fall, which it did after the Reserve Bank cut the cash rate.
World sharemarkets tumble after the US Federal Reserve chairman, Ben Bernanke, said he would have to start "tapering", or curtailing, the massive money printing that had been under way to help stimulate economic growth.
A consequence was that the Australian dollar, along with most other currencies, weakened against the US dollar. Our dollar dropped from about $US1.03 to a low of about 88¢.
The Australian sharemarket had a strong month after the losses of June.
The Reserve Bank cut the cash rate by 0.25 percentage points to 2.5 per cent, a 53-year low. The cut pushed home-lending rates towards record lows.
The Coalition won the federal election decisively.
And the sharemarket rose.
US debt-ceiling crisis. As the deadline for resolution approached, sharemarkets around the world dived before Congress agreed on an extension to allow the US government to continue borrowing until mid-January 2014.
Companies line up to list on the Australian sharemarket.
OzForex, the currency-transfer business, had a $2 initial offering price and finished its first day of trading 30 per cent higher.
The listings of companies surged worldwide. Loss-making Twitter raised almost $US2 billion from investors or $US26 a share. Twitter's shares opened on the New York Stock Exchange at $US45.
Australia's economy is growing below trend. Bureau of Statistics data shows the economy grew 0.6 per cent in the three months to September 30. That is an annual growth rate of 2.3 per cent.