Welcome to our Market Update for January 2010
Leading into 2010 the big questions have been; how much return, how much volatility, when will global economies begin removing stimulus (monetary & fiscal tightening), and what will happen in China?
During the December period the broader Australian market increased by 3.16%. Since October the All Ordinaries index has been flat with some instability while investors test the next level of recovery at an index value of 5,000. Economist Craig James said recently that "big years for volatility tend to be followed by quieter periods. If economies settle, so will financial markets". This may be a theme that extends from late 2009 into 2010. During history the US sharemarket has seen some sharp rebounds subsequent to large declines or 'crashes'. In most cases the year that follows that has only seen an average return of 8% in US equities.
While returns may be subdued, the question of overall volatility is another to be answered. Most economists point to the eventual removal of emergency stimulus by global economies as the catalyst for increased volatility. Interest rates in the US and Europe must increase at some stage to control economic output as it begins to ramp up. This serves to stave off the inflationary pressures that are bound to rear their head after unprecedented action to increase the level of money in global economies. As interest rates increase so will investment costs for companies. As we have seen in Australia, the rate, timing, and effect of an increase in interest rates can be difficult to predict. This uncertainty will cause some speed bumps in the recovery of global economies and their related sharemarkets, including Australia.
In the US and Europe unemployment is now 10%. Until these levels begin to decrease, the US and Europe will remain in the safe zone and keep interest rates very low. According to Economist Dr Shane Oliver "Coming out of the last three recessions the Federal Reserve only started to raise interest rates an average 12 months after the peak in unemployment". This suggests that we may not see an unwinding of monetary policy until 2011. By contrast on Australian shores, our level of employment has hit a record high during December 2009 with more Australians in jobs than ever before at over 11 million. This news will give the Reserve Bank of Australia further confidence to continue lifting interest rates to a more appropriate level for a normal functioning economy. There may however be cause for a hold on any increase at next months meeting with inflation levels being very steady in recent months.
Key figures in the global community are wary of complacency and are warning leaders not to begin tightening policy until stability is properly restored. Head of the International Monetary Fund (IMF) Dominique Strauss-Kahn commented that countries should not exit stimulus packages and warned that policymakers need to remain very cautious because the recovery remains very fragile. He suggested that the IMF would raise its growth forecasts for this year and is currently predicting the global economy will grow by 3.1% in 2010.
The peak performer, China, has begun its monetary tightening. Growth rates are now wandering back to pre- Global Financial Crisis levels. With concerns about asset bubbles in housing and even in their sharemarket, it makes sense to begin to remove the excess liquidity provided in their economy through stimulus. As is the case with Australia, economists see this as a move to normal levels of economic function rather than a restriction on China's growth. China claims that they are still targeting strong growth in 2010 and are sticking with tradition by targeting a growth level of 8%. Despite this making sense from one perspective, investors will still find uncertainty in an increase in rates. Chinese and global markets could experience some volatility as a result.
Please do not hesitate to phone if you have any queries or require any financial planning advice.
