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How have investment markets performed?
By Max McKeough, Financial Markets Analyst at Deutsche Asset Management, June 2004
Investment commentary
Australian shares
The Australian sharemarket recorded its best financial year result in seven years in 2003/04 and outperformed all other asset classes. Measured by the S&P/ASX200 Accumulation Index, the Australian market returned 21.6% in the 12 months to 30 June. While most global markets lost some momentum in the second half of the period, the Australian market achieved several all-time index highs in the June quarter.
For much of the year the market advance was supported by a buoyant Australian economy and improved company earnings. In addition, market underpinning was provided by a robust US and Asian-Pacific upturn including strong Chinese demand for metals and industrial raw materials, and historically low global interest rates.
The strength of global demand for industrial commodities was reflected in annual rises of nearly 41% and 33%, respectively, in the energy and materials sectors of the Australian Stock Exchange(ASX).
International shares
After a surging recovery from mid-2003, global sharemarkets generally eased back in the second half of the year. However, the benchmark Morgan Stanley Capital International (MSCI) World Index still recorded an impressive rise of 19.4% in 2003/04, the first positive financial year performance (expressed in Australian dollars) since the global equity market boom of 1999/2000. Exchange rate movements through the year were again an important component of the total return. The appreciation of the Australian dollar dampened strong global market returns (in Australian dollars) in the first half of the period, while the currency's slide in the second half enhanced the more subdued market gains.
Growing evidence of global economic recovery and improved corporate earnings, particularly in the US, were the key drivers of resurgent global markets, including previously sold down Europe and Japan. After such a powerful rally, however, market momentum tended to moderate from the early part of 2004. Investors subsequently began to focus more on extended valuations, the possible effects of higher oil prices, and the prospect of imminent rises in US official interest rates.
Fixed interest securities
The major factor driving fixed interest markets in 2003/04 was the improved global economic performance and outlook. Towards the end of the period, investors were increasingly concerned that inflationary pressures were beginning to reappear, although official measures of consumer price inflation generally remained benign. Thus fixed interest yields rose over the year (security prices fell) across all maturities. Australian 10 year bond yields rose from around 5.0% to 5.8% over the year after peaking around 6.0% last November. Reflecting market expectations of moves in official interest rates, 90 day bank bill (cash) yields rose from 4.8% to 5.5%.
Global bond markets also generated mediocre returns, dominated through the year by concerns about the sustainability of the growth revival, and when and by how much major central banks (particularly the US Federal Reserve ) would raise official interest rates.
As a result of these developments, the UBS Warburg Composite Bond Index returned only 2.3% compared with the 5.3% return from the UBS Warburg Bank Bill Index. The Australian bond market also underperformed the 4.1% return to global fixed income as measured by the Lehman Brothers Global Aggregate Index, fully hedged into Australian dollars.
Listed property trusts
After three consecutive years of outperforming the broader equity market, the S&P/ASX200 Property Accumulation Index return of 17.2% failed to match the broader market's resurgence in 2003/04.
In a relatively subdued first half for the listed property trust (LPT) sector, investors tended to switch to broader equity market stocks with greater leverage to the economic upturn. In the second half of the year, the LPT sector was dominated by market consolidation, as some high profile trusts merged with their management companies to create stapled investment structures with an increased focus on property development, or acquired competitors. These latest developments in the evolution of the market represent a continuation of several trends, including growth in international property holdings, and moves to internally-managed structures, which have been in play for several years.
Direct property
The main non-residential real estate sectors continued to benefit from the growing Australian economy. According to the latest figures from the Property Council of Australia, the retail sector was the best performer over the year to March 2004, returning 17.3%, followed by industrial (15.4%) and office (6.9%). The retail and industrial sectors benefited from strong domestic spending and rises in capital values while the major CBD office markets have been slower to benefit from the improving global economy. Continued expansion of the US and regional economies in 2004/05 is expected to increase demand for leased office space, particularly by multinational companies and the finance sector.
Recent Returns
Your Superannuation Scheme recorded outstanding returns this year.
This year has been a very good one for investors and the equity markets have performed particularly well.
As a result the more aggressively managed investments have reflected the high returns. The High Growth portfolio produced a return of 16.2% for the year.
The Diversified Strategy, also growth focused, produced a return of 12.6%, followed by the more conservative Balanced Strategy which produced a return of nearly 10%.
The more defensive strategies also achieved impressive results with returns of 6.1% for Capital Guarded and 4.1% for Cash.
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