2013 Market Returns

For the Australian equity market, 2013 was a significant year as it marked a second consecutive year of double digit returns for the first time since the global financial crisis. The broad market as measured by the ASX300 accumulation index was up 19.9% for the year, this followed up an almost identical 19.7% return in 2012.

Whilst in price terms the Australian market is still 1,500 points off its 2007 peak, in accumulation terms equity investors are now ahead over the past six years. Nobody would dispute the fact that returns over that period have been disappointing, however the situation is gradually improving and this is helping to bolster investor sentiment.

One point of interest about 2013 was the very marked divergence in returns between large, mid size and smaller companies. The top 50 stocks returned 22.1% for the year, the next largest 50 (mid caps) returned 16.8%, whilst the next 200 stocks (small ords) actually showed no gain at all with a small loss of 0.8%. The largest part of the outperformance of large cap stocks was seen in the first part of 2013 and the trend showed signs of reversing in the second half of the year before the market wobbled in the final quarter.

Term deposits, savings and investor sentiment

This time last year was circulating a chart from the RBA which showed the incredible build up of savings in term deposits since 2007/8. The level of term deposits in Australia went from under $200 billion to close to $550 billion in five years. This was incredible since the size of the increase represented roughly one quarter of the market capitalisation of the Australian share market!

At the beginning of 2013, the question asked was whether falling term deposit rates would lead to a “great rotation” out of td’s and into risk assets such as shares. During the year there is clear evidence that some rotation has begun. Looking forward to 2014, it would seem that there is still plenty of room for this trend to continue and this would add much needed support for the domestic market.

There is certainly still a degree of caution, one can see that from the high savings rate, however the chart below shows that consumers are beginning to think about investing again rather than only about paying down debt – a positive sign.

Outlook for 2014

After two strong years, equity valuations are now tracking above the long term average. There is a degree of caution about the outlook for this year especially given the fact in aggregate there has been no earnings growth for Australian equities over the past six years.

That said, the conditions are now in place (low interest rates, a weaker AUD and improving sentiment) for an earnings recovery to begin this year and this recovery will help to underpin gains as the year progresses. The first important test of this conviction is soon upon us with the February half yearly reporting season.

Indices:

The Australian All Ordinaries Index has moved down decreasing by -0.6% since closing last Friday to 03:20 pm today.

The rest of the world as measured by the MSCI index increased +1.0% in A$ from closing last Friday to end of trade Thursday.

Have a good 2014, we hope to see you soon. 

The team at IPS