Economic And Market Summary

Equities declined in November, as markets remain focussed on European sovereign debt issues and the slowdown in global economic growth.  In local currency terms, the global MSCI World price index fell by 1.5%, while the US S&P 500 index fell by just 0.5%. Australian equities underperformed over the course of the month, with the S&P/ASX 200 index declining 4.1%. Japanese equities and emerging markets equities also underperformed in November.

The US economy continues to face the challenges of high unemployment and high government and private debt levels. That said, US economic data continued to beat market expectations in November, and most indicators remain consistent with positive, albeit modest, growth. The unemployment rate fell to 8.6% in November, down from 9.0%. However, most of this decrease was due to a fall in the participation rate as people abandoned the search for work. The labour market remains weak, and the creation of jobs in the private sector has been partly offset by the continuing loss of public sector jobs.

The outlook for Europe remains highly uncertain, as policymakers have struggled to find a lasting resolution to the sovereign debt crisis, which now affects larger economies such as Italy. Following the European Union Summit held in early December, European leaders announced moves towards further fiscal integration, aiming to restore confidence to markets. While these were positive steps, markets were ultimately disappointed by the absence of a clear resolution to the crisis, as solvency questions largely remain. The deepening crisis now also threatens the outlook for the largest economies in the Euro zone, France and Germany. Ratings agency Standard & Poor’s placed both of these countries’ AAA long term credit ratings on negative watch in early December, citing the potential impact of the “deepening political, financial and monetary problems within the European Economic and Monetary Union”. This has placed additional pressure on European leaders to find a resolution to the crisis, and developments are likely to continue to drive market volatility in the coming months.

The uncertainty surrounding sovereign debt has also affected European economic growth, with most indicators remaining at levels consistent with a recession.  Growth has slowed in France and Germany, while deteriorating sharply in countries such as Spain and Italy. Ongoing uncertainty, coupled with harsh austerity measures, has hurt confidence, leading to a rapid reduction in business activity. The European Central Bank (ECB) cut interest rates to 1% in early December. The ECB has also continued to take steps to support the banking system, including taking coordinated action to increase liquidity in conjunction with the central banks of Canada, Japan, Switzerland and the UK.

Growth in the developing world has also slowed in recent months. Europe and the US remain important export markets for China and other developed markets, and the slowdown in these regions will impact emerging countries. Export growth has slowed meaningfully in China, particularly export volumes. In response to weaker conditions, central banks in many countries have taken policy steps to promote borrowing and support economic growth, such as cutting interest rates. Low government debt levels also mean that emerging countries are better placed to respond to slower growth with fiscal stimulus measures.

While the Australian economy continues to perform well relative to most of the developed world, European sovereign debt issues and concerns about a slowdown in China have impacted consumer and business confidence. The unemployment rate also increased slightly to 5.3% in November. The Reserve Bank of Australia cut interest rates for the second successive month in December, reflecting concern about the uncertain global outlook. Markets are anticipating further interest rate cuts in the coming year.

The Australian dollar has experienced significant volatility over the last few months, and fell by 2.3% versus the US$ in November, to US$1.03. Defensive asset classes such as fixed interest performed well during the month, and Australian fixed interest in particular has provided strong returns over the last 12 months.

Source: Access Capital Advisers Pty Ltd.

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

Prime Super is a Regulated Superannuation Fund issued by Prime Super Pty Ltd ABN 81 067 241 016, AFSL 219723. A Product Disclosure statement can be obtained from the issuer and should be considered before deciding whether to acquire, hold or dispose of an interest in the Fund.