Investment outlook after a strong financial year By Dr. Shane Oliver, Head of Investment Strategy and Chief Economist

The past financial year saw returns of over 20% from Australian and global shares, providing very strong returns from balanced and growth oriented investment strategies.

While returns are likely to slow over the year ahead, they are likely to remain solid as share valuations are still reasonable, the global economy continues to grow, the Australian growth outlook improves into next year and monetary conditions remain easy.

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Gold Price Rallies Most Since 2011 as Investors Reassess US Interest Rate Outlook

ETFS Precious Metals Weekly

Key points

• Backwardation in gold market indicates continued shortages.
  
• Silver is the wild card this week. Silver was the only precious metal to decline last week, losing 1.2% to $19.4oz.
  
• Platinum and palladium continue to outshine gold. Palladium continued to be the best performing precious metal, gaining for the second consecutive week.

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National Australia Bank Quarterly Australian Residential Property Survey: Q2 2013

Housing market sentiment weakened in all states in the June quarter as prices took a backward step and rents slowed. Capital and rental expectations were also more measured, with confidence seemingly undermined by softer economic growth and downside risks posed by the economy’s structural adjustment. WA is the most optimistic state for prices in the next year, followed by Victoria and NSW. Resident owner occupiers more active in the established market, while new developments attract more investors. Foreign buyer activity remains elevated at around 13% of total demand, up from 5-6% in much of 2011.

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S&P DOW JONES INDICES | PERSISTENCE SCORECARD

Market participants often look at past performance and related analytics when selecting funds. But how much does past performance really matter?

The Persistence Scorecard, produced twice a year, aims to answer this question by tracking the consistency of top performers over consecutive annual periods. The latest scorecard again revealed that very few funds can consistently be top performers.  For the three years ended March 2013, just 16.57% of large-cap funds, 14.22% of mid-cap funds and 23.05% of small-cap funds maintained a top-half ranking over three consecutive 12-month periods

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Precious Metal Prices Surge on Dovish Fed Comments, Strong China Data - ETF Securities Research

Key points

• Gold and silver price rebound accelerates as Fed highlights dovish position.
  
• Platinum and palladium prices back in focus on South African strikes.
  
• Gold Forward Offered Rates (GOFO) rates turn negative for the first time since the Lehman crisis.

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China acts against excessive lending by Michael Collins, Investment Commentator at Fidelity

China’s new rulers, by initiating the tightest credit squeeze in more than a decade, have signalled to banks and other financial players that they need to improve their lending practices and better safeguard their assets. The decision by China’s central bank to ignore a jump in the cash rate that was sparked by rumours that a small bank was in trouble has consequences for the country’s economic growth.

On June 20, China’s three-month-old government failed to inject enough liquidity into the money market and
short-term borrowing costs climbed. The one-day repurchase rate, one barometer of interbank lending, spiked to a record 12.9%, compared with an average of 2.51% in the first five months of the year. (The more-alarmist reports led with the interbank-lending or cash rate reaching 30% on June 20.). Analysts surmised that the inaction was a warning to banks to rein in the explosion of lending and investment that Beijing kicked off in 2009 to protect China’s economy from the global financial crisis.


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The new threat to the US economy by Michael Collins, Investment Commentator at Fidelity

As effortlessly as magic, the US economic recovery is helping shrink Washington’s budget deficit as more taxes and income roll in and fewer welfare payments are sent out. The Congressional Budget Office predicts the US federal deficit will narrow to about 4% of GDP this year and dwindle to 2.1% of output by 2015 – less than a quarter of the post-crisis high of 8.5% of GDP in 2010.

Improved government finances are just one of the benefits of a stronger US economy, which expanded at an annual rate of 2.5% in the first quarter. A US recovery that is robust enough to survive the withdrawal of stimulus tied to tax increases in January and the sequester in March has helped the Dow Jones Industrial Average breach 15,000 for the first time. It has bolstered consumer confidence to a five-year high, reduced the jobless rate to 7.5% from a post-crisis high of 10.1% and is driving a housing revival.


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The spectre of inflation by Michael Collins, Investment Commentator at Fidelity

The Federal Reserve judges that inflation is low enough for it to prolong its third splash of quantitative easing. In Japan, deflation is so entrenched policymakers are opting for radical stimulus to get any inflation. The eurozone is tumbling into a Japan-like deflationary spiral. China has tamed inflation for now. The Reserve Bank of Australia has cut the cash rate to a record low to reverse disinflationary forces. Commodity prices are dropping, even gold. Global bond yields hover at record lows. The narrowing of bond yields over inflation-linked yields shows inflation expectations are falling. Yet, for some reason, warnings about out-of-control inflation persist.

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Why The Commodity Super-cycle is Far From Dead - Nitesh Shah, Associate Director – Research & Nicholas Brooks, Head of Research, ETF Securities

Key points:

• The commodity super-cycle that started in the late 1990s is far from over.
• The combination of substantially higher absolute levels of demand and the increasing scarcity and rising cost of commodity production will force prices higher over the next 10 to 20 years.
• The industrialisation, urbanisation and rising wealth of large population emerging market countries will continue to drive demand higher.
• Although much attention has focused on the likely reduction in the economic growth rates of China and India over the next 20 years, per capita incomes are expected to triple over the coming 20 years, driving substantial increases in per capita and absolute levels of consumption of a wide range of commodities.
• The long-term supply of most commodities will remain constrained due to their increasing scarcity and rising costs of production.
• Higher prices will encourage the more efficient use of the world’s scarce resources and incentivise the investment and innovation necessary to boost supply productivity.

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China and Central Banks Step Up Gold Buying as Price Falls - eft Securities

Key points

• China's gold imports from Hong Kong increased 40% in May from a month earlier, as bargain hunters increased purchases.
  
• Central banks buy 24 tonnes of gold in April and May.
  
• Platinum and palladium prices may rise on growing South Africa labor issues.

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S&P/ASX 200 Earnings Report July Edition

Key Highlights

• 8 companies in the S&P/ASX 200 have reported annual earnings thus far for FY 2013. 50% have reported earnings better than street expectations, polled by Capital IQ analysts. Collectively, the S&P/ASX 200 has reported a 1.9% EPS surprise.
• Last year, 40% of all companies in the S&P/ASX200 had beaten earnings street expectations.
• Of those companies who have announced earnings, only one has shown double digit or better Y/Y growth.
• Companies still remaining to report with the largest expected earnings growth for FY 2013 include, Independence Group NL (ASX:IGO) +913.5%, Bank of Queensland Ltd. (ASX:BOQ) +856.3%, and Senex Energy Limited (ASX:SXY) +264.2%.
• Companies still remaining to report with the most upward revisions for FY 2013 in the past month include, Oil Search Limited Limited (ASX:OSH) 10 upward revisions, CSL Ltd. (ASX:CSL) 8 upward revisions, and QBE Insurance Group Ltd. (ASX:QBE) 8 upward revisions.
• Companies still remaining to report with the largest FY 2013 EPS% change in the past month include Western Areas Limited (ASX:WSA) +18.0%, Magellan Financial Group (ASX:MFG) +15.0% and Shopping Centres Australasia Property Group (ASX:SCP) +12.4%.
• Companies with the greatest potential upside based on S&P Capital IQ consensus target price include, Discovery Metals Ltd. (ASX:DM) +438.1%, Linc Energy Ltd (ASX:LNC) +306.5%, and Perseus Mining Limited (ASX:PRU)+252.2% (*data as of 6/30/13).
• 12 companies are expected to report annual earnings in July including:
• Origin Energy Limited (ASX:ORG) with an S&P Capital IQ EPS consensus estimate of, $0.71
• BHP Billiton Limited (ASX:BHP) with an S&P Capital IQ EPS consensus estimate of, $2.42
• Fortescue Metals Group (ASX:FMG) with an S&P Capital IQ EPS consensus estimate of, $0.50
• On June 23, 2013, Metcash Limited (ASX:MTS) reported annual earnings of $0.31, narrowly missing the S&P Capital IQ consensus estimate of $0.32. This was the fourth straight year that the company has failed to exceed analysts’ expectations. The wholesale distributor grew earnings by 3.3% when compared to last year. Revenues of $13.10 billion were slightly above consensus and up almost 6% versus a year ago. Its Food and Grocery segment has come under significant pressure from its loss on Franklin retail stores. However, it’s Liquor and Hardware & Automotive divisions both reported strong sales along with improved margins. Management did not provide any guidance, but incoming CEO Morrice announced they plan to update investors with their strategic plans in December. Shares of stock spiked up 5% following the earnings release, but treaded downward to finish the month.

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Chris Caton Chief Economist of BT Investment Management

Caton’s Corner July 2013
Share market volatility continued in June. At the close on 20 June, the Australian market had fallen by 3.4% from its 31 May level while the US market was down by 2.6%. This brings the year-to gains to 2.4% and 11.4% respectively. At the current low point for this correction, during the day on 13 June, the Australian market was down by more than 10% from its 14 May close of 5221. That low point may, however, be challenged on 21 June.

There is no doubt what the major international force driving markets is: the continued concern that the Federal Reserve may end its programme of quantitative easing (QE). QE expands the Fed's balance sheet, and the chart above shows the apparent effect this has had on the US share market in recent years.

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Investment Plus - Macquarie Private Wealth Research

During May the Australian dollar was down nearly 10% against the US dollar. In the shorter term, the lower domestic currency is expected to benefit Australian companies, particularly those with a global earnings footprint. Longer term, the weaker Australian dollar may improve the outlook for Australian economic growth.

Key points:

Global markets continued their positive trend in May. The US equity market continued to be supported by stronger than expected corporate earnings, with 42% of the companies that reported their first quarter 2013 results beating consensus by more than 5%. The European markets were broadly positive on slightly improved confidence. Despite China’s official purchasing managers index (PMI) surprising to the upside during May (at 50.8 versus consensus of 50.0), the Hang Seng fell 1.5%. In Japan, the Nikkei retreated by -0.6% as volatility in Japan’s bond market encouraged investors to take profits on an index that has risen more than 45% since the elections held during December 2012.

In Australia, economic data continued to highlight weakness in the economy, with sharp falls in consumer confidence, declining house prices, insipid retail spending (rising a modest 0.2%), waning business investment, falling job advertisements (down 2.4% in May) and downgrades from a raft of mining services companies. Despite the recent weakness, the Reserve Bank of Australia (RBA) left the cash rate unchanged at 2.75% at their June Board meeting citing recent data is consistent with the outlook published by them last month.

While this month’s inaction on rates by the RBA indicates a reluctance to acknowledge the weakness in the economy, the board retained the bias to easing rates, noting the inflation outlook continues to provide scope to cut interest rates further if required. We expect that the likely timing of the next rate cut will be at the August Board meeting, following the release of June quarter inflation data.

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