Finances: 2013 – the Year in Review

Another strong year for share markets World share markets have performed extremely well in 2013. As the year draws to a close, the MSCI All Country World Index (comprising both developed and emerging share markets) seems on track to produce returns well above 20 per cent for the year for Australian investors. Here in Australia, investors in our share market have enjoyed returns of better than 21 per cent so far this year.

For bond investors, 2013 has been more challenging. The sharp falls in bond yields across much of the globe during the aftermath of the global financial crisis led to very strong returns from bonds. However, yields in most major bond markets have moved higher this year, which has meant returns from both Australian and global bonds have been very modest.

The robust performance of share markets in recent years has also boosted longer term returns for investors. The chart1 below shows the performance of the major asset classes in Australian dollar terms so far in 2013, and for longer time periods. All asset classes now show positive returns over the three and five year periods to the end of November.

The year to date and three year returns from Australian and global shares are particularly strong.

1 Benchmark data are UBS Bank Bill Index (cash), UBS Composite Index (Australian bonds), Barclays Global Aggregate hedged to $A (global bonds), S&P/ASX200 A-REIT Accumulation Index (Australian property securities), MLC global property strategy benchmark hedged to $A (Global property securities), S&P/ASX200 Accumulation Index (Australian shares) and MLC global equity strategy benchmark (MSCI All Country Indices hedged and unhedged in $A).

The great irony at the moment is that good news is causing sharemarkets to react badly and bad news is often causing sharmarkets to react positively!

We are constantly asked why decisions in the United States affect Australia so significantly – particularly considering our sharemarket has performed strongly over the past 12 months.

At the time of writing, this all stems from the fact that the US Federal Reserve is expected to wind back, or ‘taper’ the economic stimulus it is providing to their economy. If the Fed can commence to wind back its stimulus program, this signals the ‘all clear’ for the US recovery – great news for the global economy, given that America is still by far the largest economy on the planet. For a medium sized trading nation like Australia, this is very positive news.

However, in the short term, this ‘tapering’ would make it more expensive for people to borrow money, which causes markets to react negatively. Its important to focus on the ‘big picture’ – that is, it is extremely good news that the US economy might have recovered to the point it can be taken off life support!

Tapering is the buzz word to describe the Fed starting to reduce the amount of additional stimulus each month, e.g. to $65bn from its current $85bn. It does not represent a tightening of monetary policy but a ‘turning down of the tap’ of additional monthly stimulus. Policy tightening is probably years away.

The Australian dollar (AUD) is also affected. Higher US bond yields have been attracting money back to the US, taking advantage of the higher rates. To do so, foreigners needed US dollars, bidding the US dollar higher. A higher US dollar, other thing equal, means a lower AUD.

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