Inflation - The Consumer Price Index (CPI) increased by 1.0% in the September quarter 2009, up from the 0.5% rise in the June quarter. This took the annual rate of inflation down to 1.3%, from 1.5% in the year to the June quarter 2009. This inflation rate is obviously well below the RBA’s 2%-3% target band and is the lowest annual inflation rate since June 1999.

The news for underlying inflation, which excludes volatile price movements, was not as positive with the annual growth rate remaining at elevated levels. The underlying measure of inflation rose 0.8% over the September quarter with the annual inflation rate declining to 3.5% from 3.9%. This remains above the RBA’s 2%-3% target range and the RBA will watch this measure closely.

The above economic table becomes very encouraging when you stand it next to other developed nations on the planet.

Unemployment  - Employment surprised on the upside with 40,600 jobs created in September 2009, versus market forecasts of 10,000 job losses. This lowered the unemployment rate to 5.7%, from 5.8%. Annual employment growth turned positive, recording +0.10%. Prior to September’s employment data, employment growth was -0.33% which was the weakest level since February 1993.   These positive results are tempered with the knowledge that working hours have dropped significantly with ABS reporting a fall of 4 million hours (0.27%).  
GDP – The latest figures available are for the June quarter (September not released until 16 December). The  June quarter revealed an increase in  GDP of 0.6% for he 3 months to June 2009. The 12 month result of June to June also yielded the same result an annual increase of 0.6%.  It is the annual result that breathes confidence of turning the corner by reflecting positive activity for 12 months.

What was behind the good GDP result?

• 0.8% increase in consumption thanks to the government fiscal stimulus measures.
• Capital expenditure now also on the rise with 1.9% increase in private business investment -  attributable  mainly to the investment allowance and the resultant 5.6% increase in spending on machinery and equipment.
• Negative influences on GDP came from new building construction and imports.

In summary, whilst Australia has not had 2 successive negative quarters for GDP growth, we have had a 2% rise in unemployment which is not finished with yet.  This is definitely recessionary behaviour, however the dual prong attack by the government fiscal stimulus packages (at both  the personal and business level) and the RBA discount interest rates have set the agenda fro the RECOVERY in economic terms to be under way (or the very least just around the corner).

Source – Colonial First State

Monetary Policy - Interest Rates

NO interest rate rises were received by 30 September, however we all know the RBA has raised rates by 0.25% in both their October and November meetings.  It is important to put this into perspective.  This should not be seen as a tightening of monetary policy but simply an unwinding of emergency (stimulatory) settings back to more ‘normal’ levels.  In simple terms the heavily discounted interest s are no longer. 
Whilst the SALE on bank loans is over, it is worth noting that this is a reflection of a more optimistic RBA about the direction of the Australian economy.

The Aussie Dollar is arguably the strongest of the worlds well-traded currencies.  It is in a primary uptrend against not only the US dollar but also the GB pound, the Euro and the Yen.  The dramatic fall from grace during the worst of the global financial crisis has now been fully reversed with parity ($1 for $1) with the Greenback the subject of widespread discussion.

The Australian dollar has had a tumultuous 12 months falling by 40% then rising by 35% in 6 months earlier this year. The strengthening of the dollar has been a direct result of recent movements in commodity prices as well as a weakening of the US dollar.

IN the 6 months from March to September, the rising currency has impacted global share investments.  From March lows, USA shares were up 55% (similar to Australia) however the $AUD was up 35% creating a negative impact to Australians investing overseas. 

The All Ordinaries Index rose a further 5.7% in September, the 7 consecutive monthly gain. Over the 12 months to September 2009, the index has risen 2.3%.  Since reaching its low on 6 March 2009, the Index has risen 52.3% to 30 September closing at 4739.  

The Australian share market has rallied sharply over past six months. This was driven by realisation that the worst case scenario for the global and Australian economies did not eventuate.  This has been driven by better than expected economic data in Australia, further signs of recovery in the global economy and supportive initiatives out of the G20 meeting in the US.  As a result, company profit expectations have risen. 

While this is positive, share price gains are now starting to factor in substantial earnings growth over the next few years. For this to happen, private demand must return within the economy, allowing companies to grow revenues and expand operating margins to provide earnings growth. The big test will be when governments around the world begin to withdraw  the large amounts of monetary and fiscal stimulus. 

Capital Raisings  -  Over the past 12 months, Australian listed companies have raised around A$100bn in new equity. Over September, Primary Health Care, Paladin Energy and AWB were just some of the companies to raise additional equity, with a number of small companies also accessing the market. With investor appetite for equities returning, the initial public offering market has re-emerged.

Listed property  - This sector also continued to rise, gaining 9.8%, following a sharp 16% rise in August. The sector has now risen 56.8% off its lows in May. Confidence has returned to the sector, following large capital raisings and debt reductions. Global property markets also moved higher in September. With the exception of Italy, China and Japan, all major markets recorded positive returns. The strongest performance was in Germany. The UBS Global Investors Index (Net TR) A$ rose 5.8% in the month to be 25.3% lower over 12 months.

The Paradigm moving forward for Australian Shares

A trifecta of good results have come from the September preliminary figures for  “Established house prices”  of Australia’s eight capital  cities.

1. As evidenced by the Established House Prices bar chart below, the weighted average price index for Australia’s capital cities has had its 2nd consecutive quarter of growth with a rise of 4.2% for the quarter.  This follows four consecutive quarters of negative movement between June 2008 and June 2009.  

2. This was enough to move the National (weighted) average to a positive 12 month result of 6.2% from September to September.  This is a significant shift when you consider the National (weighted ) average for June to June was –1.4%.  

3. The trifecta of good news is that the result was wide spread with every capital city (including Perth) recording positive results for both the last quarter and also the last 12 months to September 2009.

Overall the result of the last 3 months was fairly even across all cities which may be a reflection that the first home owners grants shows no location bias.

It will be interesting to review this same graph in six to twelve months time to see if the number of first home buyers drops off sharply between September and December and also whether investors enter the market in sufficient numbers to prevent a drop off in property prices.

The change in trend from four negative quarters to 2 positive quarters in my opinion is a reflection of two underlying factors :

1. The First Home owners Grants have fuelled an increase in first home purchases.

2. The state of the economy as a whole is showing more positive signs and confidence the worst is behind us.

Both of these factors have resulted in an increase in participants (both buyers and sellers).  As we head into the new calendar year the baton is passed form the first home buyers to the property investors to keep up the activity rate in the property market to fuel continued price growth in property.  The fact that the  RBA sees fit to unwind the excessive interest rate discounts of the previous year should be seen as a positive sign that the country’s economic watchdog themselves are feeling more optimistic about our economy.  We expect this confidence to continue to spread through  the investor market.

The Governor of the Reserve Bank Glen Stevens in his speech on 5th November 2009 summarised things best with his closing comments :

”As we look forward to a new expansion, Australia has many advantages.

• The financial sector remains in pretty good shape.

• The Government does not own, and has not had to give direct support to, any financial institution (therefore, will be relatively free of the difficult governance and exit strategy challenges that such support is raising in some countries).

• Public finances remain in good shape, with a medium-term path for the budget back towards balance, and without the large debt burdens that will inevitably narrow the both macroeconomic and microeconomic – remain in place, and they have worked.

• We remain open for trade and investment, with an exposure to Asia, which still has the most dynamic growth potential in the world over the next several decades.

These advantages are already paying dividends. Properly exploited, they will pay many more.

But there is no such thing as effortless, or riskless, prosperity. There is still a business cycle, and we do well to remember that even if we have been spared the worst of the recent downturn, we will need to continue investing in all the things that helped us get through the recent episode.  And, we will need to accept and manage various changes that will probably confront us over the years ahead.

The road to prosperity will have some bumps, twists and turns. But it is the road to the right destination.”

Want to know more about Investing?
Book a consultation with your Hudson Financial Adviser by calling
free call 1800 804 296 or book online
READ OUR GENERAL ADVICE WARNING