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Infocus Wealth Management announced as financial advice affiliate to First Super

Infocus Wealth Management today confirmed it will provide financial advice services to members of First Super as part of a broader initiative championed by Industry Fund Services.

Financial services provider Industry Fund Services and Infocus Wealth Management have been working on developing a national financial advice referral program for client members of Industry Superannuation Funds.  Whilst the client referral program between First Super and Infocus Wealth Management starting this month is the first in progress, Infocus anticipates it will be one of many for the group.

Infocus Wealth Management’s Managing Director, Rod Bristow, is delighted with the outcome and acknowledges First Super for making available to its client members, the offer of a full service financial advice offer.  According to Bristow, “Infocus is honoured and excited by the opportunity to support First Super in its initiative, especially since offering retail advice to client members has traditionally been something many industry funds were not prepared to consider.  First Super is leading the way for other Super Funds and should be celebrated as the first movers that they are.  As an independently owned wealth management group, we understand and respect the commercial concerns of Industry Funds.  It has been from this foundation that we have progressed with a transparent and accountable process that has given both Industry Fund Services and First Super the confidence to move forward with us”, he said.

Financial advice services to be delivered by Financial Advisers across the Infocus Group will initially roll out to First Super members in South Australia.  “It is our intention to work closely with First Super to ensure the success of this initiative in advance of a broader national rollout.  We have highly skilled and incredibly personable advisers on the ground in South Australia and right across the country and we’re confident we will be able provide exceptional service to First Super’s members accordingly”, Bristow said.

Beyond this initiative with Industry Fund Services and its member funds, Infocus is in discussions with other organisations and employer groups to provide similar outsourced financial advice services for consumers nationally.

Economic Update – April 2015

The Big Picture The ASX 200 danced within a range just shy of 6,000 and twice it was only a handful of points away from making a break-through during the trading day.

The main focus for the month in markets was the speech by Dr Janet Yellen, the United States (U.S.) Federal Reserve Chair. As with our own Reserve Bank (RBA), analysts go through every word looking for the slightest change in policy stance. This month, analysts expected the word ‘patient’ to be removed from Yellen’s words in reference to the timing of the first rate hike.

Expectations had fluctuated between June and September as the start point for hikes. Yellen deftly did indeed remove the word ‘patient’ but emphasised that it did not mean they were now ‘impatient’. Markets loved that and surged on the news.

Moreover, the Fed forecast for the Fed rate was halved with 2015 now expected to end at 0.625%. The previous (December 2014) forecast for 2015 was 1.125% and before that it was 1.35%.

Clearly, the view now is that the first rate hike will be very small and that may, indeed, be the last increase for some time.

The US nonfarm payrolls (jobs) data again came in very strongly with more than one million jobs having been created in the last three months. Unemployment fell from 5.7% to 5.5% but the hourly average wage rate fell back to +0.1% from +0.5% in the prior month. It is this statistic above all that will show any real signs of life in the economy or not – at least in terms as to whether the US economy can sustain a rate hike.

At home, the RBA left our rate unchanged but the market has priced in a cut for April or May. Our jobs data were better than many expected after the previous month’s slippage.

We created +15,600 new jobs which were more than those lost in the previous month. Moreover, the December jobs data were about three times bigger than the one just released! Unemployment fell from 6.4% to 6.3%.

Our economic growth was not great at +0.5% for the quarter and +2.5% for the year but such figures are not weak – they are just a bit below trend.

The Intergenerational Report was released by Joe Hockey in March and it showed that, under a no-change in economic policy scenario, our National Debt to GDP ratio would rise to 122% in 40 years – from 12% today – and put us in the same debt category as those countries in Europe and elsewhere that we now think are struggling.

As we said in our budget paper report last May, the government was on the right track but it failed to sell its story. It just released a ‘White Paper’ on tax reform to open up that discussion. Carrying on doing what we are doing is simply not an option and it never was in recent years.

With only 2% of taxpayers contributing 26% of the total personal tax collected by the country, raising the top rate is not the answer either. Importantly, the government is declining to cherry pick one tax or benefit at a time but to stand back and take the country into a full and proper realisation of the extent of our problems and its solutions.

Not only the discussion but also the reduction in the speed of budgetary change will stimulate the economy more than we all previously thought. Things are starting to look pretty good.
                     Asset Classes
Australian Equities Our market got knocked around a bit by another bout of instability in iron ore and oil prices. The Energy and Materials sectors fell by about ???6% over March but the overall market was reasonably flat at ???0.5%. Some of the end-of-month volatility was due to ‘window dressing’ by fund managers to square their performance statistics for the quarter.

We have estimated the fair price of the market to be 5,750 meaning that we are ahead in making our forecasts made last June and which we refreshed on January 1st. The end-of month March close on the broader index was 5,892 so we are about +2.2% overpriced.

The market is so close to 6,000, the first crossing since early 2008 is most likely to happen soon but it did get to 5,996 on March 3rd 2015 before a very sharp retreat! Markets often get the jitters around ‘big numbers’ like 6,000. We are confident that closes above 6,000 (and retreats) will be common in the coming quarter and may even ‘stick’ at some point near mid-2015. Our 2015 forecast is for a close at 6,150 and a temporary ‘high’ before that of 6,500. In other words, the November 2007 high might seem tantalisingly close within the next 12 months.

As we stressed last month, with more rate cuts on the horizon by the RBA, cash is certainly not king. When rates start to rise, they might rise quickly! High yield stocks could then take a small beating with capital losses wiping out their recent yields.
Foreign Equities Wall Street fared worse than us losing ???1.7% on the S&P 500 in March while London’s FTSE lost ???2.5%. The German DAX bucked the trend at +5.0% but they have been embroiled in both the Ukraine and Greek issues and are now finding their way out. The World Index was down ???1.8% but Emerging Markets held up at +0.3%.

Yellen helped us all with her well-chosen words but one day those words must include ‘rate increase’. Then, there will almost certainly be some market volatility to follow – even though we all know it will happen and the real impact of a tiny rate rise will be small. It’s a bit like being told at a New Year’s Eve party that ‘the party’s over’ – even though it is 3am.
Bonds The ECB started its 1.1 trillion euro QE stimulus programme in March. So far there has not been any obvious adverse reaction.

Around the world many government bond yields are close to zero or even negative. Our ten year yield stands at about 2.3%.
Interest Rates The RBA did not cut again in March and may not do so in April – preferring to wait and see the next inflation read first. To reiterate, it is highly likely that the RBA will cut at least once more this year, otherwise the February ‘rushed cut’ will seem like a mistake.

What is interesting is that only 7 of 27 economists surveyed by Bloomberg expect a cut on Tuesday 7th April but the market – those people who take actual financial positions – are pricing in a 70% chance of a cut. It seems easier to position for a cut on Tuesday than simply be forced to wait a month for some action, if necessary. Missing the cut means the chance has gone!

The US Fed is in no rush to raise rates but there are consequences on its growth when it eventually does. Quite frankly, the current Fed rate range of 0% to 0.25% is not very different from 0.25% – 0.50% after one little hike, but markets would react negatively in the short run. We still think a hike before September is unlikely.

The US jobs data due out on Good Friday (they don’t have a holiday like us!) will give us a big clue – if we focus on how much workers are earning (via the hourly average wage rate) rather than the actual number of people working. If wage rates are not rising, there is no real pressure in the economy that needs subduing and rates will likely be on hold in the US.

What was fascinating in a Boston Federal Reserve research paper at the end of March (they usually fall far short of exciting) is a survey that is showing a big shift to so-called ‘informal’ employment – such as baby-sitting and dog-walking – which is not necessarily reported to the relevant agencies – including the IRS! People in the US have been supplementing full and part-time work at quite an unprecedented rate.

At least 24 countries have cut rates so far this year. It will be a brave Central Banker that bucks the trend. New Zealand tried it and regretted it!
Other Assets Iron ore prices seemed to have settled down at above $60 / tonne but then they slipped towards the end of the month. They are now only just above $50 / tonne.

Oil prices are still low but off the recent lows. The Saudi Arabian incursion into Yemen is increasing oil-price volatility even further.

Gold got back above $1,200 / troy ounce but it has returned to bubbling along just below that level. Our dollar has been fluctuating in the high seventies but it did fall ???2.0% over March.


                     Regional Analysis
Australia Australian economic data released during March was largely benign – no important stand-outs and no important failures. But there has been a stand-out improvement in political debate and the polls are starting to show it.

Queensland and NSW had state elections that came in with starkly opposing outcomes. The political party popularity polls have started to move, but more importantly, the government has massively changed its short-term policy stance. It seems to have the same long-term plan for Australia’s future but it now realises (at last) that it must take the electorate with it.

We find it exciting and refreshing that positivity has replaced negativity – at least on the business TV channels.

There are so many confidence polls these days it is difficult to make sense out of the very small changes that we have been seeing in each poll. We can summarise that the results are not yet strong – neither are they seemingly deteriorating. If we are correct in our assessment of the impact of the more recent changes in the government’s approach, both business and consumer confidence levels might be seen to start rising sharply from the end of April.
China China’s Purchasing Managers’ Index (PMI) for manufacturing came in on the 1st April at 50.1 – just above the 50 that signals constant economic growth – but, importantly up from 49.9 the month before.

The new China growth plan is targeting economic growth of 7% going forward, from 7.5% last year. China’s inflation (CPI) came in at +1.4% against an expectation of +0.9%. The limited stimulus is helping get the rate of inflation back into the target band.
U.S.A. The US had another very strong month with employment data. There were +295,000 new jobs and unemployment fell back to 5.5%. The monthly average for new jobs in 2014 was +246,000, up from +193,000 in 2013. One million jobs were created in the last three months alone!

US growth came in at +2.2% in its third and final revision for Q4, 2014. However, most commentators are attributing the particularly cold weather for bringing growth down to that modest rate. On the other hand, the consumer spending part of that GDP read was very strong at over +4%.

The US is starting to struggle with its stronger dollar. After several years of having a weaker dollar because of its stimulus programmes, it is now on the other end of the stick. Japan and Europe have big stimulus packages on the go while the US ended its last October.
Europe The new Greece government was voted in on an anti-austerity platform. But as it has made such a mess in its deliberations with the troika (ECB, IMF and European Commission) to get out of the austerity conditions for its bailout, that comparable anti-austerity parties in France and Spain took a beating in recent polls.

Had the new Greece party done a better job, there could have been some very negative ramifications for the whole European economic situation.

The ECB has lifted its 2015 growth target to +1.5% but lowered its inflation forecast to 0.0%. Slowly but surely, the recession fears are receding.
Rest of World Venezuela has joined the ranks of countries suffering from low oil prices. It is struggling with the $50bn debt to China but the deal is that they can pay off this debt with oil rather than cash! Of course, falling oil prices mean that they need to ship even more oil for the same interest payments. China has stepped up to the plate and offered a further $10bn loan.

Russia is reportedly talking to Argentina over the rightful ownership of the Falkland Islands that caused a war between Britain and Argentina in the early eighties. Russia is also looking for other allies around the globe. The dominance of the US and Europe is slipping. China and Russia are playing bigger roles.

And now Saudi Arabia has mounted air strikes on Yemen. One media outlet questioned whether this could amount to a ‘Vietnam-like conflict’ that the US, Australia and others were involved in over 50 years ago. One can only pray that the parallel is far from reasonable.

*Ron Bewley(PhD,FASSA)– Director, Woodhall Investment Research

Important information

This information is the opinion of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523 trading as Infocus Wealth Management and may contain general advice that does not take into account the investment objectives, financial situation or needs of any person. Before making an investment decision, readers need to consider whether this information is appropriate to their circumstances.

Economic Update – March 2015

The Big Picture

The Big Picture Just when things were starting to look predictable at Central Bank level, spanners from all directions were thrown into the works. India and Denmark had already got the ball rolling with rate cuts when, on January 16th, the Swiss National Bank (SNB) walked away from its cap on the Swiss franc against the euro.
Any move like that would always be a surprise but the three year deal was strongly supported in a statement by the SNB only two weeks before. Traitor may well have been uttered as the franc ‘popped’ a massive 41% on the news. These days, a 1% change in one day for most currencies is thought to be big. 41% (even though it later pulled back) ruined some retailer investors, brokers and hedge funds.
So why did the SNB do it? Who knows? But they knew the European Central Bank (ECB) was due to meet and probably announce a money printing scheme that would undermine the value of the euro. Such an event would have placed further pressure on the Swiss franc and something had to give.
Days later, just as we were getting used to the full impact of the SNB decision, the Canadian Central Bank surprisingly cut its interest rate from 1% to 0.75%. Not one economist expected this decision – just like with the SNB. The Canadian dollar plummeted 2% on the news and took our dollar with it.
However, Canada and Australia have very different economies. Both are heavily reliant on commodities, have large land masses with relatively small populations and are related by the Commonwealth games. The big difference is that Canada is an exporter of oil while Australia is a net importer.
Canada loses income from low oil prices. Australia gains by leaving consumers better off from lower oil prices. Of course there are some winners and losers in each country but the big picture is that we are much better off than Canada on this account.
The trifecta of central bank surprises came from the ECB when it not only announced ‘QE’ (Quantitative Easing meaning money printing), it overachieved – at last! Their programme is much bigger and better than was expected.
Printing money doesn’t guarantee growth – but it does buy time for governments to do what governments must do. We probably have a year or more before we know if it is working. In the meantime, Europe is good.
That didn’t stop Greece voting in a new government that is against ‘austerity’. Nobody likes austerity but one has to face the music when one gets into debt. But the low bond rates across Europe – and the better shape that many countries are now in – means Greece is no longer a major issue for people living outside of Greece. Contagion is not expected this time around.
So with the United States (US) having undergone QE for years, Japan having recently jumped in with both feet, China having its own version – and many other countries doing much the same – what is going on?
At the moment, every county would like to devalue its currency. A lower currency means cheaper exports and more expensive imports – so a country gets the balance sheet in order and devalues their debt! But everyone can’t devalue. It is a race to the bottom.
It is, of course, the same reason why our Central Bank – the RBA – wants a lower currency. So far it has relied on talk (or jaw-boning) but it might act in some way. However, our economy has done so much better than most over the last seven or eight years, we are less reliant on these quick fixes that may or may not work.

Asset Classes

Australian Equities

January was a bumpy month, but it finished strongly – up +3.3% on the month. Stocks reliant on oil and iron prices were hit hard but some stocks reached all-time highs – such as CBA. We see the ASX 200 reaching 5,850 by the end of 2015 with a possible high of 6,200 during the year. The index currently stands at 5,588.

We have our index modestly overpriced by +1.2% in the short-run but our long-run view is that we are about  5% underpriced.

Trading is usually light in January because of the summer holiday season. As a result, volatility can often be elevated and it was. But volume came in big and strong in the last week reinforcing the market strength.

The fall in the $A is thought to benefit many exporting companies. Lower oil prices could help companies outside of the resources sector. But, at this point, our broker-based forecasts point to an ‘average’ year of about 6% capital gains plus 5% dividends and maybe 1.5% franking credits. The total expected return is strong but the headline number for the ASX 200 might not please as much as some would like.

The keys will be revealed in the February reporting season as companies map out their expected futures. Since it takes some time for currency and commodity price effects to ‘pass through’, any real benefits may not become obvious until the August reporting season.

Telstra has been a stand-out performer. Its dividend yield has fallen below 5% but there has been much commentary that Telstra is also becoming a growth stock – based on new technologies and a highly skilled management team. Interestingly, the fall in the BHP stock price is almost lifting it into a yield play with an expected dividend of 4.4%!

Foreign Equities

Wall Street had a poor month with the S&P 500 falling  3.1% while the London FTSE climbed +2.8% in line with the ASX 200. The German DAX rocketed up by +9.1%. The story that played out was heavily influenced by the ECB decision to start stimulus.

Reporting season in the US is not going as well as many had expected or hoped for. Many say it is not the strength of the greenback but a failure of companies to grow their businesses that caused the fall in equities.

Bonds

With the ECB starting its 1.1 trillion euro QE programme in March, bond yields in many countries are particularly low. The US 10 year Treasury Note is yielding about 1.7%.

Our 10 year government bond yield is just over 2.5% and above those of Spain and Italy. It was only a few years ago that the so-called ‘PIGS’ countries, that include Spain and Italy, had yields of around three times more than now.

Interest Rates

The volume of chatter on whether the RBA will cut rates at their February 3rd meeting was increasing until the inflation data came out at the end of January. ‘Headline’ inflation did come in low for the quarter at +0.2% but that was heavily influenced by oil prices.

The RBA’s preferred ‘underlying’ inflation read that trims out some items like oil, came in at +0.7% – an unexpectedly high read.

But on January 28th, a journalist predicted a cut the week after and that had a major impact on market expectations. Using market pricing, the chance of a cut went from about 40% to about 65% in one day!

Given the conservative nature of the RBA, we think it seems unlikely it will move without warning – but, of course, no one can ever completely rule out a cut or a hike. Moreover, the labour market looks to be improving without a cut.

We believe it is quite possible that rates will be on hold all year but a 0.25% change either way would not greatly affect most Australians. Our call remains that the next move could be up – but in 2016.

The statement from the Fed pushed out market expectations for a hike in the US from June to around September. Again, we think no change this year is the more likely outcome. If the US does hike, it would probably only make a small increase to say 0.25% or 0.5% and leave that rate on hold for quite some time. Having a 0% – 0.25% rate isn’t a good look for the biggest economy in the world.

The main reason why we are not expecting a hike any time soon is that the US did raise rates too soon in 1938 sending the economy back into recession. The US economy is strong but not massively so.

Other Assets

Iron ore prices continue to be depressed and volatile. Recent data shows that Australia gained a big market share in ore against countries other than Brazil for sea-born imports into China. Since this was apparently a desired outcome, further falls in price from increasing supply might slow down.

Oil prices (Brent) fell another -3.2% in January but it would have been much worse had they not risen +12.5% in the last week! WTI oil was down  9.7% on the month. OPEC is predicting a rebound in prices in 2016. Gold prices took a turn for the better in January climbing +7.3% on the month.

Regional Analysis

Australia

Taken out of context, our recent, strong labour market data and moderately high inflation reported in January would be what one might expect from a robust economy. But it doesn’t feel like that, does it? As the squabbling continues in Cabinet, it looks more like Australians are weighed down from a lack of leadership rather than economic reality.

After the so-called labour market data issue in mid-2014, we now have an unemployment rate that has improved in steps from a high of 6.3% to 6.1% for the latest read.

Employment data was also strong with +41,600 new jobs created in December, with more people joining the workforce in search of employment.

Although the RBA focuses on the underlying rate of inflation – which came in at +0.7% – in setting interest rates, the inflation read we all face is the headline rate of +0.2%. With another fall in oil prices that came in since the inflation rate was calculated, consumers are in for more good times at the bowser – for now.

China

China’s Purchasing Managers’ Index (PMI) for manufacturing came in on the 1st February at 49.8, down from the previous month which was 50.1. China exports and imports both beat expectations.

Importantly, Premier Li gave an address at the Davos World Economic Forum assuring us that China will not have a hard landing. The PMI and trade data are consistent with Li’s view.

Imports of iron ore climbed as a market share from Australia, but took a nose dive from the rest of the world (ex Australia and Brazil). The BHP-RIO-Vale ‘squeeze out the expensive producers’ policy has worked by increasing supply to force down price.

U.S.A.

The US had another strong month with employment data. There were +252,000 new jobs added and unemployment fell to 5.6% but wage growth was again negative.

The US also had their best read on consumer confidence in 7 years. Not all data are great but this isn’t a country that is falling over. GDP growth did miss estimates at +2.6% (annualised) for Q4 compared to the revised +5.0% for Q3. However, growth figures go through two revisions before the next number drops and recently those revisions have largely been up. But Wall Street fell sharply on the news.

Europe

Mario Draghi, the ECB president, famously said he ‘would do what it takes’ a couple of years ago. At last he delivered – and in spades. Money printing does not solve real world problems but it does buy time. His plan goes at least until September 2016. The heat is off.

Spain just recorded its 6th quarter of strong economic growth and it is now at levels not seen since 2007!

The problem with Greece voting in a left wing government that is against ‘austerity’ is not what will happen in Greece but what might happen in related countries’ elections in the near future. Is Spain ahead of the curve?

Of course no one likes austerity – and nobody should vote for it (at least willingly) – but when you have maxed out your credit card somebody has to take the loss – the borrower or the lender. At least the SYRIZA party seems to be a reasonable group of left wing people who needed another party to form government. Problem contained!

But the big danger is, Europe has nothing left in the bag if QE doesn’t work to buy enough time. With 12 – 18 months breathing space, investors have time, but time can run out.

Rest of World

The problems in the Middle East that are spilling over into the rest of the world are not going away any time soon. But the possible actions and the consequences are not the stuff for economists. We choose not to comment.

Japan did raise its GDP growth forecast to over 2%, which is not that bad. Canada is joining Russia, Venezuela and Nigeria as those countries are suffering from low oil prices.

In December, Russia hiked its key interest rate from 10.5% to 17% in one go. A month later it dropped that same rate down to 15%. The rouble is in trouble. There seems to be no easy fix for Russia with oil prices and sanctions front of stage.

The best part of the Davos ‘World Economic Forum’ that just concluded was an OPEC chief – and OPEC has controlled oil prices since 1973 – stating that oil prices will stay around current levels for 12 months and then rebound. If he doesn’t know when this will happen, who does? So why didn’t that presentation get more airplay?

*Ron Bewley(PhD,FASSA)– Director, Woodhall Investment Research

Important information

This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs. Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523 trading as Infocus Wealth Management.

Economic Update – January 2015

The Big Picture

Anyone expecting – at the start of December – a quiet run-in to New Year’s Eve would have been very disappointed. Oil price falls and guess-work over what the US Federal Reserve might say about interest rates caused a severe bout of jitters on markets earlier in December. However, all’s well that ends well.

Wall Street reached new highs in the last days of the year and our market bounced back strongly. Perhaps, like last year, our market might continue its ‘Santa rally’ into January. We have the fair value of the ASX 200 estimated to be 5,550. The market finished the year at 5,411 – up +1.1% on the year and +1.8% on the month.

The big talk at home has centred on our official interest rate. Will they cut, or will they hike? The mood changed over the month but little can reasonably happen before March given past statements by the Reserve Bank.

In spite of pessimism recorded in various confidence surveys, forecasts for Australian economic growth and employment are not bad. Retail sales were up a creditable +0.4% in November.

Overseas, the US and United Kingdom (UK) economies continue to strengthen, the European economy continues to struggle and China still has a managed slow-down to sustainable growth in place. However, Russia is a different story. It was already struggling with the Ukraine conflict and the consequent sanctions placed on Russia. With oil prices almost halving over 2014, Russian exports have taken a massive blow and a serious recession is very likely to follow.

What happens in the Russian economy does not usually affect us much but this time it could be different. President Vladimir Putin is already forced into a corner over Ukraine. If the pressure increases further one might ask if he could over-react. An alliance between China and Russia changes the balance of power in the world and the demand-supply conditions for world resources.

Looking forward to 2015, lower oil (and petrol) prices could make a big difference to consumers at home and abroad leaving more to spend on other goods and services. Even a gentle rise from around $55 per barrel now to $80 per barrel would still leave consumers so much better off than at the start of 2014 when oil was around $100 per barrel. No one is predicting big improvements in oil prices but OPEC must react at some point. As in most situations stability in commodity prices and currencies is worth having to pay a premium for.

It is a relatively safe bet to say that the US economy will strengthen and Wall Street with it – at least, that is, until the US official interest rate rises significantly – probably in 2016.

It is also a fairly safe bet that our economy will not be as strong as that of the US. However, moderate gains on our stock market are consistent with broker forecasts and we expect the ASX 200 to peak during 2015 to somewhere near 6,200. We do not expect the ASX 200 to stay above 6,000 for an extended period of time until late in 2015 or early 2016.

So by expecting capital gains of about 9% on the ASX 200 and 8% on the S&P 500, there is a strong case for some investors to consider diversifying across both asset classes. Dividends on the ASX 200 should be about 4.8% with franking credits on top. Of course investors in overseas share markets need to consider currency risk which might amplify returns or detract from them.

Asset Classes

Australian Equities

With a +1.8% bounce in December, our market finished the year just in front of where it started.  While +1.1% for the year might not seem much, it translates into about +7% when dividends and franking credits are taken into account (and before tax). And that is much better than having been in cash!

There was an unusual divergence in the returns of the Top 20 stocks over 2014. Most resources companies did quite badly while some companies in other sectors did extremely well. Those who favoured the high yielding sectors of Financials (+9.8%), Property (+27.0%), Telcos (+20.8%) and Utilities (+16.1%) should have done very well indeed. As it turns out the defensive Health sector (+24.4%) did particularly well over 2014.

With rates on hold in the US at least for the first half of 2015, the so-called ‘yield play’ seems likely to outperform resource plays in the near term. However, there were some encouraging signs at the very end of 2014 that resources stocks had been over-sold and a bounce might be expected in early 2015. As always there is more expected risk attached to resource stocks over high-yield stocks.

At last there is a reasonable chance that the ASX 200 will exceed 6,000 for a little while in the second half of 2015. It is quite common that investors take profits when big psychological levels, such as 6,000 are breached. If the market does end 2015 at 5,900 or thereabouts as we predict, investors should be very happy, especially because of the relatively high yield and franking credits in Australia.

Volatility is ever-present and increased volatility might occur when the US Fed starts raising rates.

Foreign Equities

Wall Street continued to make new highs in December and the Dow Jones index crossed 18,000 for the first time. Both the Dow Jones and S&P 500 indexes lost a little steam in the last few days but the S&P 500 was up +11.3% on the year. The world index was up only +3.6% over the same period.

The big question for local investors holding US stocks is the impact of our currency. The Governor of the Reserve Bank of Australia is trying to talk the dollar down. If he is successful, the S&P 500 returns in $A (Australian dollar) would be amplified. But if it goes the other way, Australian investors would be getting lower returns than their US counterparts.

Bonds

With the US QE programme well behind us, and a clear period of stable official rates ahead, bonds should have a stable future in the near term. But when rates do start to rise in the US, bond yields will rise eroding the expected total returns for bonds.

If the European Central Bank finds a way to purchase government bonds from its member nations as it is trying, some optimism should sweep across Europe in early 2015.

Interest Rates

There were big changes in interest rate expectations in both Australia and the US during December. Analysts switched from forecasting hikes to cuts in 2015 for Australia. The market is pricing in one and a half cuts (to 2.125% from 2.5%) next year but the Governor of the Reserve Bank continues to focus on stability in monetary policy.

We see no need to cut rates as that would have limited impact on the economy. There are better ways to stimulate the economy through fiscal policy from the government – but it does not seem close to moving in that direction yet.

The US Federal Reserve has given strong hints that it will not raise its official rate anytime soon – possibly even after 2015 ends! More than likely there will be one or two very gentle increases in the second half of 2015.

Other Assets

Iron ore prices fell a little further in December but they appeared to stabilise and they even rose back above $70 per tonne at the end of the year. The share prices for BHP and RIO gained later in the month from their 2014 lows.

Oil prices also fell further in December but the share prices of the major Australian energy producers bounced back after, apparently, being oversold.

Gold prices continued to fluctuate near $1,200 in December. Our dollar lost nearly 4% in December to finish the year at $0.8171, after starting 2014 at $0.8948.

Regional Analysis

Australia

The call for rate hikes in Australia changed to a call for cuts during early December. Westpac even went for two rate cuts starting very early in 2015. There were plenty of ‘soft’ data to question the current monetary policy stance but a cut is far from inevitable.

The falling currency and oil prices make parts of the economy potentially much better off. There were +41,800 new jobs created in November but unemployment stands at 6.3%. Full-time employment actually fell by  1,800.

The Reserve Bank did not change rates in December and it does not meet in January. It is also doubtful if they would cut in February without some prior hint so March seems the earliest for us. However, a lot can happen between now and March making a cut unnecessary.

The Treasurer released MYEFO (Mid-year Economic and Fiscal Outlook). The unemployment forecast peak in Q2 2015 has risen from 6.25% to 6.5%. Currently unemployment is 6.3%. The forecast deficit has climbed from $30bn to $40bn and debt is expected to peak at half a trillion dollars. We do have a debt problem.

Clearly the current government is not making any great inroads into economic reform and the Prime Minister’s popularity continues to decline. But economic growth is still forecast to be +2.5% this year and +3.0% next – which is just a fraction below trend.

China

China’s Purchasing Managers’ Index (PMI) for manufacturing came in on the 1st December at 50.3 and down from the previous month. The January 1st read was 50.1 for the month of December – spot on expectations. Both numbers are above the ‘50’ that divides expansion from contraction. The sequence is gliding towards a stable ‘50’. China is on a stable growth path but quite a few other data releases disappointed in December. It is likely that China will continue with targeted stimulus packages.

China’s consumer price inflation is below target at 1.4% and producer price inflation remains negative at  1.6%. It is unlikely; therefore, that China will just sit on its hands.

U.S.A.

US GDP growth for Q3 was revised upwards from +3.5% to +3.9% in November and its final revision in December lifted growth to +5.0% for Q3!

Non-farm payrolls (employment) data came in at a massive +321,000 – making it the 10th month in a row to beat the psychological level of +200,000 – with the unemployment rate standing at 5.8%.

The all-important Federal Reserve Meeting reinforced that it will be ‘patient’ in waiting for the right time to lift the official rate. The Fed now predicts the rate will be 1.125% at the end of 2015 from 0% – 0.25% at the moment. At the previous meeting, the End of Year (e-o-y) forecast rate was higher at 1.35%. The e o y unemployment forecast is 5.2% and the Fed expects more people to join the workforce in search of jobs to counteract the booming employment numbers.

The Fed also stressed that it will be at least two more meetings before it signals any interest rate rise, making the earliest time for a hike to be June 2015.

US shale oil explorers are reportedly cutting back on their investment in new projects. This behaviour is exactly what OPEC was after when it failed to support oil prices by not restricting supply. Perhaps OPEC will soon reverse the price decline. It has the power to do so.

Europe

The European economies continue to struggle but the European Central Bank did not cut rates at its December meeting. However, there is increasing speculation that the Bank’s president is working on a solution to bring in a full stimulus package very early in 2015.

With political uncertainty forcing an election in Greece on January 25th – three days after the European Central Bank meets – the party that wants to exit the European Union may gain control. However, that is not the same as leaving the euro.

But more importantly, when this situation last arose in 2010 and 2011, people feared a knock-on effect to Spain, Italy and Portugal. Those countries are in much better shape now and bond yields are much lower. There is little to fear from Greece these days. Argentina defaulted last June but hardly anyone outside of that country noticed.

Rest of the World

The sliding price of oil has particularly affected Russia’s economy. It is so dependent on oil exports that the price of oil – along with the Ukraine conflict and the sanctions it has generated – looks likely to launch Russia into a full blown recession in 2015.

China has offered economic support to Russia but such an alliance could make it more difficult for Australia if a Sino-Russian relationship strengthens. Russia is rich in resources – just like Australia.

Russia was forced to increase its key interest rate from 10.5% to 17.0% in one go to help support its crumbling currency, the rouble!

Japan Prime Minister Shinzo Abe was re-elected in December with a very large majority. Already he has announced a $29bn stimulus package to help those who were hurt by the April increase in sales tax. Japan’s Q3 GDP growth was revised down to  1.9% from  1.6%.

The Hong Kong protest against how its politicians are elected ended quietly without any concessions having being won.

After 50 years, the US has at last lifted restrictions on US citizens travelling to Cuba. Obama acknowledged that the restrictions had no discernible impact on Cuba. Cuba welcomed the change but asserted that it will remain Communist!

*Ron Bewley(PhD,FASSA)– Director, Woodhall Investment Research

Important information

This information is the opinion of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523 trading as Infocus Wealth Management and may contain general advice that does not take into account the investment objectives, financial situation or needs of any person. Before making an investment decision, readers need to consider whether this information is appropriate to their circumstances.

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