Sharemarkets both here and around the world showed solid performance over the last 12 months despite the lingering effects of the Global Financial Crisis in the form of sovereign debt concerns in Southern Europe.
The performance of Global Shares was 5.3%[1] in the year to 30 June 2010 although the last 3 months declined by 4.8% as concerns about the ability of the Greek government to pay its debts triggered a contagion effect on global sharemarkets. Given an insolvent government has never had a solvent banking system, and strong banks are required for economic growth, concerns around a “double dip recession” have surfaced around the world and held markets back in recent times.
For the unhedged Australian investor, the global sharemarket performance may have been better but the Australian dollar strengthened against most major currencies over 2009/10 thereby providing a slight drag on performance for unhedged global investors. The performance of Hedged Global Shares to the year ending June 2010 was therefore a much better 11.7%[2].
The Australian sharemarket had one of the better sharemarket performances around the world with a one year return to the end of June 2010 of 13.8%[3]. Most of this performance was achieved during the first quarter after which the market has largely moved sideways as local interest rates increased and the above-mentioned Euro-Sovereign debt concerns appeared.
The rising local interest rates put a mild dampener on local bond returns but they were still a reasonable 7.9%[4] for the year ending June 2010. The Reserve Bank increased interest rates from 3% at the start of the financial year to its current level of 4.5% and this resulted in a 3.9%[5] average cash return for the year ending June 2010. Whilst the Reserve Bank announced that they are more likely to increase than decrease the cash rate in the future, it is likely that the Euro-Sovereign Crisis will be the main determinant and therefore may stay on hold unless global economic data produces some extremely positive results.
The next 12 months will continue to present some challenging times for global financial markets as the above-mentioned debt issues are resolved. Australia continues to be the lucky country with a strong resource market continuing to sell its commodities to a fast growing China. Our residential property market continues to be buoyant and this is also a strong positive for our economic strength given its contribution to household wealth. Whilst these issues are positives, they also define the main risks to the Australian economy and our sharemarket strength. Whilst we anticipate further gains in sharemarket performance over the coming year, we also anticipate it will be a bumpy ride.
[1] MSCI World ex-Australia (Net Dividends) Index in $A
[2] MSCI World Index (AUD) Hedged
[3] ASX All Ordinaries Accumulation Index
[4] UBS Warburg Composite All Maturities Index
[5] UBS Warburg Bank Bill Index