Market Update - December 2014

Market Commentary

The US ended the year on a positive note as consumer confidence continued to improve. A rapidly growing labor market and reduced petrol prices provided momentum going into 2015 with the Federal Reserve on track to start increasing interest rates by the middle of 2015. The outlook for Europe was less optimistic as disinflation worries resurfaced in December. Greece also re-emerged as a troubled economy during the first half of the month; its equities index was down over 12% on one trading day during the period. There was also comment that an ECB Quantitative Easing Program may not be as effective as in other nations such as the US and Japan. Asian economies ended the year soundly but questions remain over the sustainability of GDP growth rates for 2015.

Oil continued its plunge in December losing nearly 20% of its value. OPEC continued to maintain its stance that it will not be cutting oil production despite the fall in demand which has been crippling oil prices. Russia’s economy has been hit hard as a result of these falls and the Ruble traded at or around all-time lows throughout the month. The Australian Dollar depreciated considerably again in December, down over 4% for the month and almost 15% since July 2014.

The investment returns of the major markets for one and three months to 31 December 2014 are summarised below.

*Estimate at 6/1/2015
Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays

The MSCI World ex-Australia Index (hedged into AUD) fell 0.6% over the month. The Australian Dollar depreciated against most major developed world currencies and this resulted in a positive return of 2.7% (in AUD) on an unhedged basis. Across developed markets, the strongest performing share markets in local currency terms were New Zealand, Australia and Singapore. The weakest performing regions in local currency terms were Greece, Italy and Portugal. Emerging markets (unhedged in AUD) lagged developed markets. The markets of Brazil and Russia again lagged developed markets in local currency terms.

The Australian share market as measured by the S&P/ASX300 Index was up by 2.0% over the month. The performance was largely positive across market capitalization (or company size) with the Mid-Cap 50 a standout, up by 3.9% for the month. Large Caps and Small Caps both recorded a positive month with 2.0% and 0.5% returns respectively. Performance was negatively impacted by Resources that continued to suffer due to market concerns in relation to Chinese economic growth and the consequent impact on Oil and Iron Ore prices. From a sector perspective, Health Care and Capital Goods led the way while Consumer Services and Retailing struggled.

Bonds, in particular Australian bonds, provided a comfortable investment return for the month.