Market Update – January 2014
An unimpressive start to 2014
Global equity markets started 2014 on a weak note as investors retreated from emerging markets (EM) on concerns that issues would spread to developed markets. EM central banks have struggled to keep a lid on both inflation and debt, and these problems were brought into focus in January when the Fed announced it would continue tapering QE (by a further $10 billion), in effect sucking liquidity out of emerging markets and seeing heavy pressure on their exchange rates. The MSCI EM (USD) fell 6.6%
Other factors weighing on global market confidence were a number of poor economic reports including a weak Chinese PMI print late month and severe weather patterns in the US. This saw the MSCI World Index ex-Australia fall 1.2%, and the US S&P500 -3.6%.
Even though data coming out of Europe continued to point to improving conditions for an economic recovery, European markets also fell with the key markets of Germany, France and the UK falling -2.6%, -3.0% and -3.5% respectively.
Australian equities (S&P/ASX300 Accumulation Index) fell by 3.0% in January with most sectors finishing in negative territory. Resources (-2.9%) surprisingly outperformed industrials (-3.0%), albeit marginally. Energy (-3.8%) and iron equities fell together with crude oil and iron ore. Consumer discretionary (-4.5%) tumbled on a string of downgrades (Super Retail Group, The Reject Shop and WOTIF.com) while financials (-3.9%) slipped on general market pessimism. Utilities (+0.7%) and healthcare (+0.3%) meanwhile bucked the trend and marched into positive territory on the back of strong earnings stability.
The Reserve Bank of Australia (RBA) met for the first time this year in February, leaving the cash rate unchanged at 2.50% and removing the easing bias and the reference to the overvalued Australian dollar. The Bank expects growth to remain below trend for a time yet and for unemployment to rise further before it peaks. The Bank also stated that beyond the short-term growth is expected to strengthen, helped by continual lower interest rates and the lower exchange rate and that inflation is expected to remain consistent with the 2-3 per cent target over the next two years.
Our overweight position in electronic retailer, JB Hi-Fi (-16.4%), detracted from relative returns. Despite lifting NPAT by 10% to $90 million the company fell sharply on doubts over the broader consumer discretionary sector. Evidently the company is performing well in an environment where other retailers have made every effort to eke out the smallest gain. Its product cycle continues to be a key element of strength with popular gaming consoles and ultra hi-definition televisions bolstering sales. While the business trades at a premium to its peers we regard it to be a reflection of its competitive advantages and therefore remain invested.
Our overweight position in media firm, Nine Entertainment (+11.7%), contributed to relative returns. Nine recovered its initial IPO dip following strong capture of advertising market share. The company has drawn 38% of the total ad space with a similar percentage in audience viewership. Advertising spend is growing at a reasonable 3-4% though the real revenue injection will come from higher fees as customers pay more for congested timeslots. Nine has historically been hurt by content costs but those headwinds are in our belief absent this time around. We expect the business to remain well-leveraged to the recovering ad cycle.
Fixed interest, credit and cash
Bond markets of the most credit worthy countries benefited as equity markets wobbled and investors sought the security of bonds. Australian and global bonds each saw positive months, with 1.09% and 1.89% returns respectively for January.
Cash credit market spreads tightened over January on the back of renewed optimism for global growth.
Strategy and outlook
Despite the recent sell-off the market appears to be fair value overall. While domestic banks and insurers have, based on attractive yields and higher margins, rallied for much of 2012 and 2013 they are both unlikely to push out further as payout ratios flatten and bad debts revert to their historical average for the banks.
Globally the focus will be on how the US economy progresses from the Fed’s tapering of their bond purchases and, importantly, how the housing and consumer sectors hold up with higher rates. The impacts to emerging markets need to be contained as any contagion could derail the current trajectory of markets.
Bonds will also trade in line with these expectations and our view is that volatility will increase and while we expect to see equities and bond yields higher over the medium term, the path to get there could be quite bumpy.
As was the case in 2013 we see the predictable and recurring earnings growth being rewarded along with continuing discipline in capital management. In terms of tailwinds, selective companies with leverage to the lower Australian dollar continue to be well positioned as are some of those cyclical stocks that should ultimately benefit from loose monetary conditions and a pick-up in consumer and business confidence.
- Download BTIM’s January 2014 Fund Manager Commentaries for a more detailed analysis of:
- domestic and global market performance in January 2014
- how BTIM funds performed, and
- our portfolio managers’ outlooks for the period ahead.
- Download this market update in PDF format