In general, investors find it an easy task to work out how the Australian sharemarket is performing. It is merely a case of looking at a benchmark index like the All Ordinaries or ASX 200 and then comparing it with similar benchmark indexes across the globe.
But results of the past year have shown that performance comparisons aren’t as easy as it looks. And it depends on whether you are looking from the perspective of an Australian or foreign investor.
For instance, last year the All Ordinaries index seemingly went nowhere, falling by 0.7% over the year. By comparison, the US Dow Jones index rose by 11%. Given the relative weakness of the US economy and relative strength of the Australian economy, the results seem odd. But a few other factors need to be taken into consideration.
First, around 40% of Australian shares are held abroad. So foreign investors carry some clout. Second, the Australian sharemarket is around 2% of world sharemarket capitalisation. And third, the Australian dollar was the second strongest in the world last year.
Foreign investors need to take the currency into account when assessing the performance of our market as well as its relative value. So it is useful to assess performance in the same currency.
One way is to look at the MSCI indexes in US dollar terms. The so-called world MSCI index (less Australia) rose by 9.2% in 2010 versus a gain of 9.8% for the MSCI Australia index. So it appears that the Australian market actually slightly out-performed the broader global index.
And while the lift in the MSCI Australia US dollar index fell slightly short of the 11.9% gain for the MSCI United States index, this followed a year of out-performance. In 2009, the MSCI Australia index in US dollar terms soared by 68.8% versus a 27.5% gain in the MSCI US index.
All this may still prove cold comfort for local Australian investors. It was still the case that Australian share prices barely budged in 2010, while total returns were up only 3.3%. But it does highlight the fact that times have changed – the world is a smaller place and investors across the globe are weighing up where the value lies. And the level and direction of the currency is an important consideration for foreign investors.
Domestic analysts and investors also need to consider currency issues as well as the value of competing investments across the globe when assessing the value of large cap local stocks. For instance, Australian banks may initially appear attractive to foreign investors, but a high Aussie dollar may lead to re-assessment about the value of the investment. So it is of value for local investors to view things from a foreign perspective.
The week ahead
Inflation data dominates in Australia in the coming week, while US investors will be focused on earnings results, the first Federal Reserve Board meeting of 2011 and data on economic growth.
In Australia, figures on business inflation will be released on Monday in the form of the producer price index (PPI). Usually the PPI is influenced by a small number of factors, especially oil prices and the Aussie dollar, and again that should be the case with the December quarter figures.
When measured from the end of the September quarter to the end of the December quarter, the Aussie dollar lifted by just over 5%. But on average over the quarter the gain was even more significant – up by 9%. The stronger Aussie dollar should have pushed down prices of imported goods and thus overall business inflation in the quarter. But oil prices also soared over the quarter, up by around 14%. So on balance, the PPI probably lifted in the quarter by around 0.8% after a gain of 1.2% in the September quarter.
Unfortunately, the business inflation figures tend to bounce around and don’t tend to be a good gauge of inflationary pressures. So attention will quickly shift to the consumer price index (CPI).
In the September quarter, inflation was boosted by higher utility charges, but offset by lower petrol prices. Fortunately there will be no repeat of the higher water and electricity prices in the December quarter figures. But petrol price rose, not fell, in the quarter – up by around 2.4%.
The main seasonal influence pushing inflation up in the quarter was the cost of domestic travel and holidays, while the November rate hike may have boosted the financial and insurance services category. But the other big influence on prices was the widespread discounting applied by retailers. Prices across recreation, clothing and household contents sectors were no doubt restrained or reduced over the past three months as retailers attempted to shift slow-moving stock.
Overall we expect that the CPI rose by around 0.7% in the quarter or 3.0% over the year. Underlying inflation may have also lifted by 0.7/0.8% or around 2.6% over the year.
The only other data release of note is the delayed “Modeller’s Database”, now expected on Thursday. The main interest is the latest estimates on wealth calculated by the Bureau of Statistics and Federal Treasury.
In the US, the first batch of economic data is released on Tuesday. Not only will figures on consumer confidence and home prices be released, but the Richmond Fed manufacturing index is issued, while the Federal Reserve begins a two-day policy-setting meeting.
On Wednesday the December new home sales estimates are issued, with analysts tipping a small lift to a 300,000 annual rate.
On Thursday, data on durable goods orders, pending home sales, weekly jobless claims and surveys covering Chicago and Kansas City regions are expected. Durable goods orders are expected to have lifted 0.9% in December.
And on Friday, economic growth, data on employment costs and consumer sentiment are expected. Economists expect that the US economy grew at a 3.5% annual pace in the December quarter.
While the US earnings season has been underway for a fortnight, the bulk of companies will actually report their results over the coming fortnight. Among the companies reporting on Monday are McDonalds, American Express and Texas Instruments. On Tuesday earnings are expected from 3M, DuPont, Yahoo! and Johnson & Johnson. Activity heats up on Wednesday with Eastman Kodak, Peabody Energy, US Airways, Xerox, E*TRADE, and Symantec issuing results. On Thursday AT&T, Caterpillar, Colgate Palmolive, Ford Motor, Procter & Gamble, Amazon.com, Microsoft and ResMed release earnings. And on Friday Chevron will be among a small group of companies to report their results.
Interest rates, currencies & commodities
CommSec expects a “tame” inflation report in the coming week, ensuring that interest rate settings will remain on hold until at least the June quarter. The Reserve Bank wants to keep underlying inflation around 2.5% and that objective will be broadly satisfied with the December figures. The one-month overnight index swap rate hit an 11-week low of 4.6134% on Wednesday, suggesting a 55% chance of a rate cut in February. The pricing overstates the risk of a rate cut, but it is certainly amazing how swiftly views can change.
The Queensland coal industry is slowly getting back to normal. All mines are now operating at full permanent staffing levels according to union officials with contract workers gradually returning to work. The Dalrymple Bay Coal Terminal is now shipping coal at 70% of normal volumes, up from 60% last week. So far the port has shipped 2.5 million tonnes in January compared with “normal” volumes near 3.5 million tonnes. The good news is that coal producers have the potential to reap higher prices given tight market conditions. Spot coking coal prices are up 25% since late December while thermal coal prices are up by 13%.