Another weak week for global markets, especially commodities led by gold, and the euro.
As we approach 2012. AMP Capital Investors’ Chief Economist, Dr Shane Oliver looks back at a miserable year and forward to one which we hope will be better.
2011 was to be a year in which the global recovery became more self-sustaining, underpinning further gains in investment markets.
Instead it has turned out to be a year of disasters, starting with the floods in Australia, the New Zealand earthquake, the Japanese earthquake, tsunami and nuclear disaster, civil war in parts of the Middle East and North Africa resulting in a surge in oil prices, the US debt ceiling debacle and ratings downgrade, and of course the deteriorating European debt crisis.
The outcome has been rather disappointing, for investors with extremely volatile investment markets and poor returns from risk assets.
Against this backdrop the key macro economic themes have been as follows.
First, global growth has been fragile and sub par with another bout of double dip worries around mid year in response to the earlier surge in oil prices, Japanese supply chain disruptions, monetary tightening in emerging countries and the blow to confidence from debt debacles in the US and Europe.
While the US picked up pace through the second half, Europe looks to have fallen into recession and emerging countries have slowed.
While inflation reared its head early in the year, particularly in emerging countries, it has faded into year end as growth has cooled and pressure has come off commodity prices.
The global monetary cycle has swung from tightening to combat inflation earlier in the year, though mostly in emerging countries, to easing through the second half as growth slowed and inflation came back under control.
Monetary policy has eased in most countries either via interest rate cuts or quantitative easing (i.e. printing money). Australia has also had a disappointing year, with disruption caused by the January floods resulting in a fall in GDP in the March quarter.
Cautious household behaviour has led to constrained retail sales and weak housing related activity has offset booming mining investment.
As a result inflationary pressures have receded and the RBA cut interest rates twice, in part reflecting the threat from Europe.
This has all resulted in a rather disappointing ride for investors, particularly from around April.
The following table shows returns for major asset classes. (Note the 2011 returns are for year to date to December 7).
Despite reasonable profit growth, share markets have had a rough ride, rising early in the year before falling in the September quarter on worries about a global dip back into recession, partly on sovereign debt woes.
Within global shares, US shares have been a clear outperformer, reflecting easier US monetary conditions, the lagged impact of the weak $US and better profit growth.
European shares have been amongst the worst performers.
Asian and emerging market stocks have been dragged down by worries about inflation early in the year followed by concerns about Europe.
Australian shares performed poorly (albeit between US shares and European shares) thanks to relatively higher interest rates, worries about China and the lagged impact of the strong $A, which weighed on earnings growth.
Listed property securities had a flat to slightly up year with their greater income yields offering some protection.
The $A met our year end target of $US1.10 early in the year but has since languished around parity.
However, it hasn’t been all doom and gloom.
Unlisted non-residential property and sovereign bonds (except in troubled countries) provided solid returns.
Gold made it to a new all time high of above $US1900 an ounce, and rose 22% over the year as investors sought a safe haven against falling values of major paper currencies.
The poor returns from shares resulted in poor returns from traditional balanced superannuation funds.
Outlook for 2012 – bad then better?
Uncertainty hanging over Europe, and to a lesser degree the US and China, suggests a very uncertain outlook for the year ahead.
However it’s worth noting, to borrow from Paul Keating, every pet shop galah is saying the same thing – Europe, Europe, Europe! So maybe it’s all factored in and – perhaps after an initial messy period, it won’t be so bad.
There are several reasons for a bit of cautious optimism.
First, Europe appears to be heading towards a resolution of sorts, which is likely to involve much greater ECB intervention, helping to limit Europe’s growth contraction next year to around -1%.
The task is beyond the scope of various bailout funds (which aren’t big enough and are under ratings pressure) & the IMF does not have enough funds.
The only organisation that can bring the debt contagion under control is the ECB.
Our assessment is that it is likely to move into top gear in the next six months – and buy bonds in troubled countries more aggressively.
A move towards fiscal union is likely to provide it with more confidence to act, the deepening European recession provides justification for aggressive monetary easing and bond buying in order to achieve price stability, and German opposition to a more aggressive ECB is likely to fade as its economy weakens too.
Second, the US economy looks like it will continue to simply muddle along, perhaps even with another “double dip” worry around mid y
