I NVES TME NT R E V I E W &
Outlook
Australian economy
The Reserve Bank of Australia left the cash rate at 6.75%
following the two 25 basis points increases in August and
November despite economic data, released through December,
continuing to point towards a solid domestic economy.
Australian shares
The Australian equity market declined 2.7% in December as
investors continued to shift to less risky assets.
In particular, investor reduced their level of exposure to
leveraged equities as a result of renewed credit concerns with
re-financing as demonstrated by Centro Property Group (CNP)
and its retail trust (CER).
Global economy
As the US economic backdrop continued to deteriorate,
the Federal Open Markets Committee lowered the federal
funds rate at its 11 December meeting by 25 basis points to
4.25%. There was disappointment that the Fed only lowered
the discount rate by 25 basis points when the market was
expecting a more aggressive reduction.
International shares
Global Share markets again slumped in December with most
major indices recording losses.
The All Ords, Nikkie Dow Jones and MSCI World disappointed
with all posting losses for the month. It would seem that the
liquidity crisis, stemming from the US sub-prime market collapse,
is still very much a concern to investors and lenders alike.
Other major asset classes
AUD/USD recovered to 0.8751 at the end of December,
supported by improved investor risk-appetite as money
market yields fell in response to central bank cash injections.
Australian bond markets had a poor December. AUS-US
spreads widened and as a result of the US bond yields rising,
but much more modestly with the 10 year Treasury yield up
9 basis points to 4.02%.
Financial Planning
January 2008
December market performance
Equity Markets –
Price Indices
Australia
Japan
Hong Kong
UK
Germany
US
EMU*
World**
Property – Price
Index
Listed Trusts
Index
All Ordinaries
Nikkei
Hang Seng
FTSE 100
DAX
Dow Jones
Euro 100
MSCI – Ex Aus
At Close % Change % Change
31/12/07
1 Month 12 Months
6421.00
–2.6%
13.8%
15307.78
–2.4%
–11.1%
27812.65
–2.9%
39.3%
6456.90
0.4%
3.8%
8067.32
2.5%
22.3%
13264.82
–0.8%
6.4%
3167.39
–1.3%
2.4%
1131.59
–0.8%
2.6%
Index
ASX LPT
At Close % Change % Change
31/12/07
1 Month 12 Months
2111.20
–8.0%
–13.2%
At Close
31/12/07
7.24
Interest Rates
Aust 90 day Bank Bills
Australian 10 year Bonds
US 90 day T Bill
US 10 year Bonds
Currency
US dollar
A$/US$
British pound
A$/STG
Euro***
A$/euro
Japanese yen
A$/yen
Trade-weighted Index
Point Change
1 Month 12 Months
–0.01
0.80
6.33
0.33
0.46
3.23
0.08
–1.78
4.03
0.08
–0.67
At Close % Change % Change
31/12/07
1 Month 12 Months
0.8752
–1.0%
10.9%
0.4409
0.6000
97.74
68.70
2.6%
–0.7%
–0.6%
–0.3%
9.6%
0.5%
4.1%
5.9%
Source : Iress Market Technology
Past performance is not a reliable indicator of future performance.
* Top 100 European stocks trading on the FTSE
** Source : www.msci.com
*** The euro was launched by European Monetary Union members on 1/1/99.
The advice contained herein does not take into account any persons particular objectives, needs or financial situation. Before making a decision regarding the acquisition or disposal of a Financial
Product persons should assess whether the advice is appropriate to their objectives, needs or financial situation. Persons may wish to make this assessment themselves or seek the help of an adviser.
No responsibility is taken for persons acting on the information provided. Persons doing so, do so at their own risk. Before acquiring a financial product a person should obtain a Product Disclosure
Statement (PDS) relating to that product and consider the contents of the PDS before making a decision about whether to acquire the product.
Past performance is neither a reliable indicator of nor guide to future performance. No responsibility is taken for persons acting on the information provided. Persons doing so, do so at their own risk.
GWM Adviser Services Limited ABN 96 002 071 749, trading as MLC Financial Planning, registered office 105-153 Miller Street North Sydney NSW 2060, is an Australian Financial Services licensee
and a member of the National group of companies. From time to time GWM Adviser Services, members of the National group of companies, associated employees or agents may have an interest in or
receive pecuniary and non pecuniary benefits from the financial products and services mentioned herein.
January 2008
Investment Review & Outlook
Australian economy and markets
Australian shares
The Australian equity market declined 2.6% in December as
investors continued to shift to less risky assets.
In particular, investor reduced their level of exposure to
leveraged equities as a result of renewed credit concerns with
re-financing as demonstrated by Centro Property Group (CNP)
and its retail trust (CER).
The essentials:
• The Reserve Bank of Australia left the cash rate at
6.75% following the two 25 basis points increases in
August and November.
• The Australian equity market declined 2.6% in December
as investors continued to shift to less risky assets following
Centro’s difficulty in refinancing its debt.
• Australian bond markets had a poor December, with
the 10 year government bond yield rising 33 basis points
to 6.33%.
• AUD/USD recovered to 0.8751 at the end of December,
supported by improved investor risk-appetite as money
market yields fell in response to central bank cash
injections.
Australian dollar
AUD/USD recovered to 0.8751 at the end of December,
supported by improved investor risk-appetite as money market
yields fell in response to central bank cash injections.
Chart: AUD/USD Exchange Rate
0.95
0.90
0.85
The economy at a glance
0.80
Australian data released through December continue to point
towards a solid domestic economy. GDP grew by 1.0% in the
September quarter, for annual growth of 4.3%, while domestic
demand rose even faster at 5.5% year on year.
0.75
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
8
The USD strengthened over the first few weeks of December
in response to better-than-expected economic news which
suggested the US economy was not in recession. Speculative
investors halved the size of their short USD position
sending the US Dollar index to its highest in two months
by December 20.
6
4
2
Domestic spending
Feb-07
Source: NAB)
10
0
Jan-07
Chart: Australian domestic demand remains strong
Growth: GDP and spending
0.70
GDP
Sep-07
Sep-06
Sep-05
Sep-04
Sep-03
Source: nab Capital (NAB)
The level of business conditions remains solid, consumer
confidence improved after the November decline, while the
labour market remains tight with unemployment at 4.5% and
a further 52,600 jobs created in November.
Interest rates
Australian bond markets had a poor December, with the
10 year government bond yield rising 33bps to 6.33%
as economic data indicated the Australian economy was
continuing to grow at a rapid pace despite the global credit
market squeeze and increased uncertainty about global growth.
Despite the strong data, the Reserve Bank of Australia left the
cash rate at 6.75% following the two 25 basis points increases
in August and November.
Aus-US spreads widened and as a result of the US bond yields
rising, but much more modestly with the 10 year Treasury
yield up 9 basis points to 4.02%. The Aus-US 10 year spread
pushed to 231 basis points at the end of December, its widest
level since April 1996. The width of this spread confirms that
the majority of investors think that Australia can decouple
almost entirely from the troubles in the US.
The December minutes showed the RBA maintains a clear
tightening bias, and that the decision to maintain the cash rate
at 6.75% in December was a ‘finely balanced decision.’
December finally saw some easing in the widening pressure on
swap spreads. The 3 year swaps narrowed a dramatic 23 basis
points as some liquidity returned to short bonds and swaps.
January 2008
Investment Review & Outlook
Global economies and markets
The essentials:
• Central bank easing was a feature of December with the
US cutting its interest rates.
• US housing markets remain a key focus with house prices
continuing to fall.
• The Bank of England also cut its base rate by 25 basis
points to 5.5% concerned that growth is slowing and
that the tightening in credit poses downside risks to the
outlook for both output and inflation.
• Global Share markets again slumped in December with
most major indices recording losses.
US
Central bank easing was a feature of December with the US
cutting its interest rates,
US housing markets remain a key focus. US house prices
keep falling and activity data keep slowing. President Bush
announced a plan to bail out stressed mortgage borrowers,
whereby sub-prime borrowers will have their starter interest
rates frozen for 5 years, but to qualify for assistance under the
plan, borrowers must have rates scheduled to reset between
January 2008 and July 2010, and must be current on payments.
As the US economic backdrop continued to deteriorate,
the Federal Open Markets Committee lowered the federal
funds rate at its 11 December meeting by 25 basis points to
4.25%. There was disappointment that the Fed only lowered
the discount rate by 25 basis points when the market was
expecting a more aggressive reduction.
The Fed maintained concern on inflation and this was
brought into sharper relief later in the month as the latest
core CPI rose 0.3% in November or 2.3% year on year, But
the downside risks to growth are rapidly outweighing the
upside risks to inflation. NAB‘s view is that the Fed is likely
to keep cutting the federal funds rate at coming meetings and
expect the fed funds rate to fall to 3.5% by mid-2008 to stem a
looming recession.
Europe
The Bank of England also cut its base rate by 25 basis points to
5.5% in December, concerned that growth is slowing and that
the tightening in credit poses downside risks to the outlook
for both output and inflation. NAB expects rates to remain
on hold at 5.5% until February 2008 before making a further
25 basis points cut and anticipate a further 25 basis points after
that; most likely in May.
While the UK cut interest rates, the European Central Banks’
policy is moving away from a further rate hike. The ECB
injected a large amount of liquidity into the system, as part
of the coordinated central bank action to ease the global
liquidity squeeze.
Global share markets
Global Share markets again slumped in December with most
major indices recording losses. For the second month in a row,
after several consecutive months of gains, the Heng Seng shed
a further 2.9% while Germany continued its progression with
a further 2.5% gain, 22.3% for the 12 month period ending
December 2007; second only to China.
The All Ords, Nikkie Dow Jones and MSCI World disappointed
with all posting losses for the month. It would seem that the
liquidity crisis, stemming from the US sub-prime market collapse
is still very much a concern to investors an lenders alike.