Market update - March 2012
The passing of March marked the end of a strong first quarter for the Australian share market, and the largest first quarter gains since 1998 for US markets, and since 2006 for European markets.
Perhaps the most notable aspect of the month was the relative lack of focus on the European debt crisis, which has been the dominant factor in determining market sentiment for the last six or seven months. Instead global macroeconomic news flow centred around continuing positive signs from the US economy and China’s softening near-term growth prospects.
In addition, market participants have been watching the political tensions in China with interest. With the transition to a new government due later in the year, the jockeying for the prized politburo positions took a dramatic turn with the fall from grace and subsequent arrest of Bao Xi Lai. Xi Lai is the former head of Chonqing province and probably the best known of the ‘neo-Maoist’ breed of politicians, who represent the left of the party. These political intrigues and murmurings of civil unrest have not significantly disrupted markets as yet, but will now be further under the spotlight, as will the political situation.
Local market performance was mixed as the market digested the February reporting season. Broadly, those companies with exposure to the US did well, with investors demonstrating more confidence in the sustainability of the economic recovery, while Resources and domestic cyclical stocks were weaker.
In terms of global equity market results, in the US the S&P 500 rose 3.1% in March, rallying for a fourth straight month. In Europe, the ESFS agreed to an additional €102 billion of support, contributing to the continuing market rally, with the MSCI Europe returning 3.68% for March and 9.51% for the quarter.
In Asia, there was a mixed bag in term of returns. Hong Kong’s Hang Seng ended the month 1.4% lower, however Japan’s Topix gained 0.3%, helped by a small depreciation in the yen, and the Shanghai Composite falling -6.8% due to concerns over Chinese economic growth slowing.
Outlook for April
While the Australian market has underperformed US and European peers, the main driver has been the same, namely the removal of the tail-risk event of a significant European banking crisis via the successful implementation of the Long Term Refinancing Operation. The rally in the market was therefore based on relief, rather than any broader improvement in the earnings fundamentals. Clearly risks remain in Europe, with further shocks likely but the market appears more sanguine so that further shocks can be insulated and contained. The US economy has seen US stocks rally harder and Australian stocks with exposure to the US economy and the US dollar in particular do well. The most recent bright spot has in fact been the US, but the recovery there is by no means assured either, against the background of higher oil prices and an enduring fiscal deficit problem that may well test markets as the election nears.
With regard to China, we believe that a soft landing is the most likely scenario, but with few catalysts for stronger commodity prices, we are seeing better opportunities in the Energy sector, with the prospect of higher oil prices and the LNG opportunity from which many Australian companies will benefit.
The RBA left the cash rate unchanged at its April meeting, however acknowledged that growth was lower than estimated and indicated that further monetary policy easing will occur should inflation data outlook provide the scope to do so. All eyes will be on first quarter inflation data released in late April.
Fund Manager Commentary
For a more detailed analysis of the domestic and global market performance in March 2012 read BTIM's latest Fund Manager commentaries