The equity market rally at the back-end of 2012 has continued into 2013 with ‘risk’ seemingly now well and truly back in vogue with global equity markets continuing to move higher.
In January, the US S&P500 posted its largest monthly gain since October 2011 and rose above the 1500 level for the first time since December 2007. At the same time European, Asian and emerging markets are also higher, while the domestic equity market (ASX 200) is now trading above the 5000 mark, its highest level since the peak in mid 2007. However, the ongoing concerns about the direction (and strength) of global growth, combined with the euro debt crisis and the continuing budgetary impasse in the US continue to weigh on market sentiment and have the potential to mitigate some of the recent market gains.
Globally, cash rates have remained unchanged in recent periods and continue to remain very accommodative, a trend that we expect will continue for a number of years. In Australia, so far the RBA has lowered cash rates by 0.50% (50bps) to 3.0% during Q4 2012, but have also resisted making any further cuts through the early part 2013.
The ongoing improvement in US housing remains one of the bright parts of the global economy. Record low mortgage rates spurred by the Federal Reserve’s aggressive monetary policy stance have assisted in ongoing signs of a housing recovery.
Notwithstanding signs of increasing stabilisation in regard to the debt crisis in Europe, there remains a significant number of structural headwinds. The labour market remains virtually stagnant with Eurozone unemployment still at 11.7%, while the strength of the euro has reduced the export competitiveness of the region and reduced a key lever (i.e. weaker currency) in assisting economic recovery.
In Japan, the economic outlook remains constrained with most recent data indicating that the nation has entered a technical recession (two consecutive quarters of contraction). Data in Asia showed that Japan’s industrial output tumbled more than forecast to the lowest level since the aftermath of the record 2011 earthquake, bolstering the case for Prime Minister Shinzo Abe to unleash a large-scale stimulus, beginning with a significant devaluation of the Yen to support the economy.
In China, manufacturing expanded at the fastest pace in 19 months in December 2012, boosting optimism that a recovery in the world’s second-biggest economy is gaining traction.
Australian Economic Commentary
While the Australian economy continues to track relatively well compared to its global peers, the recent comments by the RBA and supporting data highlight some underlying general fragility and weakness. Equally, the relative strength of the Australian dollar continues to hamper export orientated industries. That said, if the most recent data from both China, the US and Europe continues to show an improvement this may provide the fillip to the local economy.
Nevertheless, as we expect that domestic growth will continue to moderate through 2013, the potential for more stimulatory measures via further official interest rate cuts still remains.