Our thanks to AMP Capital Investors for their contribution to this month's update.
This month we have seen yet another rise in interest rates. The Reserve bank hiked the cash rate by 0.25% to 4.25%. The Minutes from the Reserve Bank’s (RBA) last meeting and a speech by Governor Glenn Stevens are expected to confirm that further interest rate increases are likely, but that rates are getting closer to their longer-term average.
The month has seen our sharemarket again testing the 5,000 level on the All Ordinaries Index. Recent and familiar themes continue to moderate market movements.
The Greek debt issue continues, but the radically different fiscal fortunes of Asia were highlighted by an upgrade to South Korea’s sovereign debt rating to A1. Upgrades to sovereign ratings in the emerging world are likely to be a recurrent theme this year. Most share markets fell slightly over the last week with details on the European Union’s bailout package for Greece, favourable economic data and good earnings results providing an initial boost. However, continued worries about Chinese tightening has dragged markets down. Further negative sentiment has stemmed from news that Goldman Sachs is being sued by the US Security Exchange Commission (SEC). Australian shares rose, nonetheless, resulting in ten weeks of consecutive gains for the first time since 1991.
The US Securities Exchange Commission (SEC) is suing Goldman Sachs over fraud in relation to a subprime collateralised debt obligation leading to concerns that other financial organisations might also be targeted. Goldman Sachs allegedly marketed a bond product knowing it was designed to fail. The bonds that made up the portfolio were mainly selected by a hedge fund manager. Other participants incorrectly assumed the hedge fund manager was going to take an equity stake in the portfolio (establishing a vested interest). Instead the hedge fund manager bet against the portfolio and made huge profits as property prices collapsed, while Goldman Sachs pocketed 15 million for its marketing efforts. While the SEC action, along with moves to toughen financial regulation, might contribute to market jitters for a while, it is hard to see it having a big impact on the US/global economic recovery which is being driven by manufacturing and global trade.
Having seen double digit gains in share markets since early February, with expectations running very high coming into the US March quarter profit reporting season and China still in tightening mode, there is a risk of a short-term pause or correction in shares. The vulnerability to a correction was highlighted by the falls in share markets in response to the US SEC action against Goldman Sachs.
However, beyond the risk of a short-term correction, the broad outlook for shares remains positive. First, recent strength in share markets has come with broad-based participation from most sectors and stocks, suggesting there is a lot of conviction behind it. Secondly, the return of jobs growth in the US adds to confidence that the US/global recovery is becoming self sustaining. Thirdly, strong corporate balance sheets and cash flows in most regions will likely drive increased merger and acquisition activity. Finally, share market fundamentals are all reasonable - valuations are still cheap, earnings are rising, global interest rates are set to remain low and there is still a lot of cash sitting on the sidelines.
The A$ could again be heading towards parity (AUD1=USD1) with the A$ breaking above its corrective downtrend from last November’s high, tough talk from the RBA and strong jobs growth adding to expectations that the interest rate differential in Australia’s favour is set to widen further, and commodity prices remaining strong.
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