The December quarter was dominated by falling commodity prices and the impact of this on the Australian economy.
In terms of equity market performance, resource companies were sell targets with the ASX resource sector dropping 13 per cent over the quarter.
Most major commodity prices experienced sharp falls over the quarter, with oil being the most heavily traded commodity, falling 40 per cent in US dollar terms. From an Australian perspective the continued fall in the iron ore price from $80 per tonne to just under $70 per tonne was more concerning.
The fall in commodity prices is not all bad news for the Australian economy. Some positives include:
Valuation multiples for the Australian equity market rose marginally over the quarter with the forward price earnings ratio pushing just above 15 times, reflecting the modest rise in stock prices and flat earnings expectations.
Sharply falling oil prices, lower global bond yields, and a strengthening US dollar were dominant influences on investor sentiment in the final quarter of 2014 and for much of the year as a whole.
Global equities delivered positive returns in a volatile quarter. The depreciation of the Australian dollar saw unhedged returns do even better.
While the US economy and financial markets continued to strengthen, growth in much of the rest of the world disappointed. Poor global growth and excess supply sent oil prices tumbling, further complicating the picture for energy-exporting economies.
Growth and monetary policies meant the US dollar strengthened versus most major currencies.
The US Federal Reserve (Fed) ended its quantitative easing programme but other central banks continued to ease monetary policy.
The S&P 500 performed well despite some concerns over interest rate rises. Equities were supported by hopes that the lower oil price would help sustain the consumer-led recovery.
Eurozone equity returns were virtually flat. Macroeconomic news remained downbeat with disappointing news from Germany’s industrial sector early in the quarter. The weak data fuelled hopes that the European Central Bank could soon start buying sovereign (government) bonds, increasing the supply of money into economy.
Japanese equities gained after further monetary policy easing from the central bank sent the yen lower.
Emerging markets posted negative returns. Russia was particularly weak amid deteriorating economic data, the falling oil price and pressure on the rouble. An interest rate cut supported Chinese equities.
There were clear divergences between market returns across the emerging market universe.
The fourth quarter continued to be characterised by the growing disparity between the economic and monetary policy outlook between the main economies. A slowdown in global demand and lower inflation expectations have created conditions for further monetary easing in 2015.
The US Federal Open Market Committee’s (FOMC) December statement shows a change in language regarding the rate hike and is more optimistic about the labour market, indicating the Fed would increase rates in 2015.
Conversely, other main economies are considering increasing their monetary easing programs.
Domestically, Australian bond yields decreased sharply. The main drivers were the weak Q3 GDP results and the fall in commodity prices offset by an increase in total employment in November. Business and consumer confidence levels dropped.
The property securities market surged during the quarter ending 31 December 2014 with most sectors benefiting from declining bond yields and improving real estate fundamentals.
Large volumes of capital have been allocated to the sector by investors looking to enjoy relatively high income returns and increasing market values.
Source: Morningstar, BNP