Market Update – March 2014

The Seesaw Continues with Lacklustre Market Performance in March

The broad Australian market as measured by the ASX300 traded in a narrow range during the month, and managed to eke over the line with a paltry 0.21%.

Despite the absence of an underlying catalyst, dispersion of sector returns was relatively pronounced. Industrials (+1.0%) beat Resources (-2.8%) as the latter unwound on continued iron ore softness and a sell-off in gold. This saw precious metal miner Newcrest Mining -12.8%) tumble along with the vast bulk of similar stocks as gold slid 3.5% to $1,283/oz. Management are at this time trying to rebuild balance sheets through capital discipline but the miner’s real issue is productivity. This operational question mark is why we are underweight Newcrest in our portfolios.

Meanwhile, building materials and construction continued to spiral higher on real estate tailwinds. Banks (+3.1%) outperformed as domestic data surprised on the upside.

Diversified financials also shared in the positives given their inherent leverage to any recovery. A good example of this was Suncorp Group (+6.0%). The stock continued to rise as investors took confidence from its recent first half results. While earnings were admittedly lower (before adjusting for legacy losses), Suncorp’s underlying profits effectively increased led by strong growth in general insurance. While a competitive retail banking environment and a lack of consumer interest in life insurance may hinder profitability our overall conviction in this stock remains intact and we remain overweight.

Consumer discretionary performance was split down the middle with ‘good’ retailers, buoyed by increased spending, and ‘bad’ media, hampered by loss of viewership.

MSCI World Index Edges Higher, US hits all-time highs

Global markets as measured by the MSCI World Index (hedged in $A) dipped only briefly following Russia’s late February incursion into the Crimea region of Ukraine and ended March 0.2% higher.

The US touched all-time highs during the month and the S&P500 finished up 0.7%, even while the Nasdaq (-2.5%) underperformed as investors retreated from technology companies.

At its March meeting, the European Central Bank (ECB) maintained the official interest rate and upgraded its 2014 gross domestic product (GDP) forecasts to +1.2%. However the market’s deflationary fears rose as the Euro area Consumer Price Index (CPI) was lower than expected, falling to +0.5% (year-on-year), suggesting that the ECB could be forced to ease further. The unrest in the Ukraine also acted as a weight on European markets as the West grapples with a consistent response to Russia.

Asian markets were mixed with the Chinese market up 1.9% buoyed by Chinas commitment to stimulus measures for their economy and a depreciation of their currency. Japanese markets were slightly negative.

Strategy and Outlook

The key drivers for equity markets over the rest of 2014 are whether companies can deliver earnings growth and how successfully the Australian economy can transition from mining to non-mining. Early signs are positive for the domestic economy, largely driven by improving consumer sentiment as lower rates starting to take effect, and rising global growth.

Globally the focus is on the US and its continued revival of its economy: it has the ability to drive world growth this year if it can maintain its momentum. In Europe the focus is on sustaining early signs of growth especially around the periphery. China will play a big part in this recovery and mixed data out of that country is continuing to drive volatility in markets.

Geopolitical risks are building up around the globe and are becoming a more important source of market volatility.

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