When good news is bad news

As we get close to the end of the financial year, a time when many investors have a good look at their portfolio as they read their super statements and contemplate their tax liabilities, it’s great to see growth investors have been rewarded with plus 20% returns for Aussie shares (S&P/ASX300 Accumulation Index) for the year to 6 June 2013. The chart below (which shows the financial year to 6 June 2013 returns for shares, bonds and the Aussie dollar) does however show some weakness over the last couple of weeks for our shares and currency. Four factors have contributed to this:

• The surprise rate cut on 7 May 2013, which, all things being equal (pity they never are!) should have been good for growth assets, saw the local sharemarket initially rise and the dollar fall as expected.
• Bernanke’s testimony to the US Congress on 23 May 2013. When talking about the US massive QE program (or asset purchase program) he simply pointed out that if he saw sustainable improvements in the economy, 'a step down' in the pace of purchases 'in the next few months' might be warranted. That good news (US economy possibly on a sustainable mend) was treated as bad news by markets spooked by the thought of the stimulus tap being turned off.
• This saw the US dollar strengthen, exacerbated the fall in the Aussie dollar, and coupled with lower rates, saw an exodus of hot money out of Aussie assets with offshore investors concerned that their Aussie dollar exposure was suddenly going down in value (we are a serious capital importer with about half of our equity and debt financing coming from overseas). Over the last couple of weeks US and Japanese investors would have seen the value of their Aussie holdings decrease around 6% as the Aussie dollar fell.

A soft number for Aussie economic growth released on 4 June 2013, raised the possibility of another rate cut with financial markets quickly re-pricing the chances of a July cut from 15% before the GDP numbers to a 51% chance.

Shares v. Bonds v. The Aussie Dollar

Source: IRESS.

• Overall, the global story can be summarised as follows:
• Good, albeit slow momentum in the US. The US has had some good news on their house prices, consumer confidence and household net wealth, which hit record aggregate highs in March (statistics released in early June), based on strong stock markets with house prices finally showing some solid growth.
• A perceived “soft patch” in Asia and Australia (see “Soft Under Foot” discussion below on Australia). In China, the Purchasing Managers Index rose to 50.8 in May, a little bit stronger than April (with a score of 50 or more pointing broadly to growth and below 50 a contraction) which shows that China’s growth may be on a stable track.
• Continued contraction and high unemployment in Europe.
• A massive experiment of quantitative easing in Japan to try and shock its economy out of its deflationary stupor.

Indices:

The Australian All Ordinaries Index has moved up increasing +35 points (or +0.7%) since closing last Friday to 2:40 pm today.

                                                                                                                    

The rest of the world as measured by the MSCI index decreased -5 point (or -1.3%) in A$ from closing last Friday to end of trade Thursday.

Have a great weekend,

The team at IPS