Market Wrap | 09.03.2012

When the tide (eventually) turns.....

Growth assets posted another positive month in February 2012, adding to a very positive January. For the year ended February 2012, Aussie shares are now up 7.3% (S&P/ASX300 Accumulation Index) and US shares are up 8.6% (S&P500, in local currency). So what has changed in investors’ minds? Given the same risk issues (Europe, US growth/debt and China slowdown etc) that have dominated markets for some time are still very much with us. It seems that the enormous amount of liquidity being pumped through the global financial system, coupled with a greater confidence that European contagion can be contained, is turning investors’ attitudes from "risk-off" to "risk-on".

This “enormous amount of liquidity” is being generated because of the following:

• The massive injection (around €1 trillion) of capital into European banks by the European Central Bank through the Long Term Refinancing Operation - essentially cheap money at an interest rate of 1%. It’s a pity this is not flowing to businesses, but I guess rebuilding the balance sheets of European banks is a more immediate concern. Importantly, this big step seems to have contained fears about a Euro meltdown particularly as the timing has coincided with the apparent successful execution of the Greek debt write down and its next round of funding.

This program is similar to the response in the US with TARP. However this is just the first leg to recovery. As we have seen in the US this liquidity injection to the system then needs to translate into tangible economic growth to be worthwhile and this could be the stumbling block for Europe.

• A build up in cash assets combined with low interest rates in the developed world (ex Australia). In the US this month, McDonalds issued 10 year debt which traded at 2.33% p.a. and IBM issued a 5 year bond with a 1.25% p.a. coupon. Many businesses in Australia would jump at the prospects of such cheap funding.

The flip side to these historically low yields from the so called “defensive” assets is that investors globally have little alternative but to turn to “growth” assets to try and fund their futures. Again Australia remains an anomaly currently, with investors still able to achieve around 5% per annum from term deposits. However, as we have seen, the competition between banks for deposits is diminishing, term deposit rates are falling and hence assets with stronger growth potential will be sought.

Perennial Investors Index

Market Returns*
	Australian Assets (%)				International Assets (%)
	Shares	Listed Property	Fixed Interest	Cash	Shares	Listed  Property	Fixed Interest	Asia (ex Japan)
Feb-12	2.0	2.3	-0.21	0.33	3.2	3.7	0.68	4.4
Year to Feb-12	-6.8	0.3	9.81	4.92	-7.3	2.5	12.06	-3.0
3 Yrs to Feb-12p.a.	13.8	15.2	6.22	4.39	2.6	31.4	10.15	10.2
5 Yrs to Feb-12p.a.	-1.7	-14.2	7.03	5.42	-6.8	-5.4	8.87	-0.1