Monthly Newsletter - November 2011

Editors Note

This edition includes the regular Inspirational Quote, Funny Picture and Market & Economic Report. This month I have also included an Educational Video about investment.

The global recovery is likely to continue, albeit slowly. Europe’s debt problems pose the biggest threat. While mining investment is booming, retailing, housing, manufacturing and tourism are likely to remain soft. Given global uncertainty and mixed Australian indicators, the risk is that the RBA may cut rates further next year.

Inspirational Quote

The greatest discovery of my generation is that a human being can alter his life by altering his attitudes of mind.

William James (US philosopher & Psychologist)

Funny Picture

Take a close look at the rug - can you see the camoulflage dog? 

Market & Economic Report

Global economy

Review: US economic data remains consistent with continued modest growth. America’s economic growth rebounded in the September quarter with Real Gross Domestic Product (GDP) expanding by 0.6% quarter-on-quarter. The labour market recorded mild jobs growth in October of 80,000 compared to September’s revised 158,000 result, and unemployment edged slightly lower to 9.0%. Consumer credit rose US$7.4 billion in September and retail sales surged but fell short of expectations in October. The Conference Board’s confidence survey for October saw a further 6.6 point decline in confidence to 39.8, the lowest result in the past 31 months. The Institute for Supply Management manufacturing and services conditions indices also disappointed in October. In terms of housing data, the Standard & Poor’s Case-Shiller major 10-city index revealed that America’s house prices have largely drifted sideways over the past three months to August, whereas construction spending rose slightly in September. The US Federal Reserve's (Fed) Beige Book survey for September provided a cautious assessment of the US economy, with the report describing “the pace of growth as ‘modest’ or ‘slight’ and contacts generally noted weaker or less certain outlooks for business conditions”. The Fed left monetary policy unchanged in November but reaffirmed that it stands ready to use all its tools if need be. So a third round of quantitative easing is still on the table.

Europe’s 27 key political leaders met in Brussels and announced on 26 October that they had agreed on a plan involving a bigger write-down of Greek debt, recapitalising European banks and boosting the firepower of the bailout fund to prevent further contagion to other countries. This led to a few days of relative calm in markets but was short lived with the Greek Prime Minister announcing a referendum on 31 October on the latest bailout package, causing a bout of panic as investors fretted it could lead to Greece going through a disorderly default and even leaving the euro, and then announcing it was off. While the Greek Prime Minister won a parliamentary confidence vote, Greece is forming a new unity government in order to pass the terms of the new debt restructuring plan, probably ahead of fresh elections early next year. This still leaves much uncertainty about the outlook for Greece. Political instability has also spread to Italy. Partly reflecting this, Italian bond yields were pushed to a euro-era high. In terms of economic data, the European Commission’s business and consumer sentiment readings deteriorated further in October to levels suggestive of a contraction in economic activity over coming quarters. In addition, the October PMI manufacturing conditions index for the region was revised down even further, the unemployment rate increased to 10.2% in September and retail sales fell 0.7% month-on-month in September. In short, Europe appears to be either in or heading into recession. Partly reflecting this, the European Central Bank cut its key interest rate to 1.25% in November.

Growth prospects for Japan appeared to improve in August with the leading index falling only marginally, however this was revised down further and preliminary readings revealed a 1.4 point fall in September. Housing starts and construction orders also disappointed.

The Chinese economy continued to cool to a more sustainable pace in the September quarter with Real GDP slowing to 9.1% year-on-year (yoy) from 9.5% yoy in the June quarter. China’s export growth also slowed sharply in September to 17.1% from 24.5% yoy in August, with growth of exports to Europe in particular slowing markedly. Adding to evidence that July marked the peak in Chinese inflation was October’s consumer price index inflation result which came in at 5.4% yoy. In China, manufacturing conditions indicators (PMIs) remained above the 50 level and the services PMI fell but remains solid. This all supports the view that China’s economy is slowing but not coming to a hard landing as many fear. Falling inflation is paving the way for monetary easing in the months ahead.

Outlook: The global recovery is likely to continue, albeit slowly. Europe’s debt problems pose the biggest threat. 

Australian economy

Review: The Reserve Bank of Australia (RBA) cut rates by 0.25% to 4.50 in November, noting that “it is likely to be some time yet before concerns about the European situation can definitively be laid to rest". The RBA’s Quarterly Statement on Monetary Policy backed up the move to cut rates by revising down both growth and inflation forecasts for 2012 and 2013. Australian economic data releases were mostly resilient in the face of global turmoil. Australia’s labour market stabilised in October with 10,000 jobs created and the unemployment rate remaining at 5.2%. The Westpac Melbourne Institute's index of consumer sentiment surged in November on the back of the RBA’s rate cut and retail sales rose solidly again in September. In October, the National Australia Bank business survey showed an increase in confidence on rate cut expectations but a slide in conditions. Australia’s trade surplus narrowed in September but remained strong. The housing market disappointed with falls in house prices, new home sales and building approvals.

Outlook: While mining investment is booming, retailing, housing, manufacturing and tourism are likely to remain soft. Given global uncertainty and mixed Australian indicators, the risk is that the RBA may cut rates further next year. 

Australian shares

October review: Australian shares rebounded in October as global share markets gained with hope of a plan to address the European sovereign debt crisis. Australian shares were given an additional lift by heighted expectations for an interest rate cut. The S&P/ASX 200 Accumulation Index returned 7.3% for the month overall.

Short-term outlook: While short-term volatility will remain high with further weakness possible, Australian shares are likely to provide positive returns on a 12-month view. The turn in the Australian interest rate cycle suggests the period of underperformance by Australian shares is over.

Medium-term outlook: Reflecting reasonable growth prospects, medium-term returns of around 10.5% per annum are likely (or 12% if franking credits are allowed for). 

Australian bonds and cash

October review: Australian bond markets rallied in October in line with the global trend. Three-year Australian government bonds opened the month at a yield of 3.62% and closed 18 basis points (bps) higher at 3.80%. Ten-year bond yields also gained, opening the month at 4.22% and closing 21 bps higher at 4.43%. Money market yields fell further as the market continued to price in interest rate cuts by year-end. The three month bank bill yield opened at 4.77 % and fell 13 basis points (bps) to close at 4.64%. The six-month bank bill opened at 4.60% and closed 1 bp lower at 4.59%.

Short-term outlook: Australian bonds are poor value at current yields but they are a good diversifier against global uncertainties.

Medium-term outlook: Returns from local sovereign bonds over the medium term are likely to be low, reflecting low yields. 

Key financial markets 

The above Market & Economic Report is from Dr Shane Oliver, Head of Investment Strategy & Chief Economist, from AMP Capital Investors Limited.

Educational Video - Is too much information making us worse investors?

Dr Shane Oliver discusses: the general investor sentiment in the current volatile economic environment; the concerns driving investor behaviour; how a rational investor would behave in this market; and tips on how investors can act in this environment.  

The above video is from Dr Shane Oliver, Head of Investment Strategy & Chief Economist, from AMP Capital Investors Limited.

Important Information

The above information provides an overview or summary only and it shouldn’t be considered a comprehensive statement on any matter or relied upon as such. The above information doesn’t take into account your personal objectives, financial situation or needs. It’s important for you to consider these matters before making any financial decision and I recommend you seek help from a financial adviser.