Economic And Market Summary

The improving macroeconomic outlook and robust corporate earnings in the US saw global equity markets increase in April. Over the course of the month, the S&P 500 index gained 2.8% and the MSCI World index gained 2.0%, both in local currency terms. However, the rising value of the Australian dollar detracted from unhedged returns earned by Australian investors. Concerns surrounding Greek sovereign debt, increasing inflationary pressures and the withdrawal of fiscal and monetary stimulus also continue to weigh on equity markets. 

Economic data from the US continues to indicate that the economy is expanding, although the rate of expansion appears to be moderating. The closely watched ISM Manufacturing and Services indices show continuing strong performance in manufacturing while growth in the services sector is beginning to slow.

The initial release of March GDP data showed that the US economy grew by a 1.8% annual rate during the quarter, a slowdown compared to the 3.2% growth rate in the last quarter of 2010. This result was below market expectations of 2.0% and was driven by soft government spending, weaker residential and business investment and lower personal consumption. Employment continues to rise slowly, with around 268,000 jobs added in the private sector in April. Partially offsetting this was the loss of 28,000 government jobs over the course of the month. As state and local governments continue to face pressure to cut spending, the loss of government jobs is a risk to the US jobs recovery.

Markets remain worried about the level of sovereign debt in peripheral Europe.  The situation in Greece is particularly concerning and many now consider that a restructure for Greece’s government debt is the most likely outcome; however, the timing remains highly uncertain. As a result, peripheral European economies have underperformed, showing reduced output or only modest growth rates. At the same time, the core European economies, such as France and Germany, have performed strongly.

While the Chinese economy performed well through the Global Financial Crisis, economic growth has begun to moderate somewhat. The Chinese government raised interest rates on 5 April 2011 for the fourth time since mid October 2010 in an attempt to combat rising inflationary pressures. Chinese authorities have also raised the bank reserve requirement ratio several times in order to slow the growth of credit. These measures have resulted in slower economic growth over the past year, however one concern is that the Chinese economy could experience a hard landing as a result.

Relative to most of the developed world, the longer term outlook for the Australian economy as a whole remains positive. That said, the two speed economy is very evident and recent economic data remains patchy, suggesting that growth will be subdued in the shorter term. The Australian dollar reached new post float highs during April, reaching a peak of US$1.10. The strength of the Australian dollar reflects continued demand for commodities as well as the very wide interest rate differentials relative to other developed economies. Certain sectors, such as tourism, education and manufacturing have been impacted by the high Australian dollar and relatively high interest rates. On the other hand, commodity or agriculture based sectors continue to perform strongly.

The S&P/ASX 200 price index was down 0.3% during the month, underperforming global equities in local currency terms. The subdued performance reflects the softer short term outlook for the Australian economy as non commodity based companies struggle with the high Australian dollar and interest rates. More directly, the high Australian dollar has negatively affected a number of large Australian companies which generate a significant proportion of their income from offshore (such as CSL, QBE Insurance Group and News Corporation). 

Government bonds continued to rally in April, proving resilient to concerns about rising inflation and the record US deficit. US treasury yields declined during the month as the market bet on slowing economic growth and continued low interest rates from the US Federal Reserve. Australian government bond yields also declined slightly over the course of the month.

Source: Access Capital Advisers Pty Ltd.

This article provides general information only and may not be relied on as legal or financial advice.

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