Market update

The table below provides details of the movement in average investment returns from various asset classes for the period up to December 31, 2007.

Australian market dips further as confidence wanes

The Australian share market fell for the second consecutive month, with December’s 2.7% decline bringing the annual increase down to 16.1%.

Source: van Eyk

Market confidence remained shaky as there was further widening of the fall-out across the globe from sub-prime loan losses. However the Australian market fared worse than many other overseas markets as it was led lower by shopping manager Centro and the listed property sector generally (see below for further details).

The financial sector was once again weak last month. Over the course of 2007, banking stocks produced a return of 10%, well below the overall market average. In December, the sector’s performance was dragged down by St. George, which dropped by 13% following revelations of some loan exposures to the Centro Group.

Softening base metal prices and further evidence of weakness in the US economy had an impact on resource stocks over December. Rio Tinto and BHP Billiton declined in price by 8% and 7% respectively. In contrast however, energy stocks were stronger as fuel prices rose around the globe.

A key pattern in the market over recent months has been the extent to which prices have been sold down following earnings downgrades. With confidence low, the market has been particularly severe on stocks that have been unable to meet previous earnings forecasts.

Smaller companies performed slightly better than the overall market, with a 2.4% decline last month. Smaller companies slightly out performed the overall market with a 17% increase over 2007. Much of this growth was driven by the small resources sector.

European markets hold firm despite falls elsewhere

Movements on international share markets over December were mixed with the overall MSCI World Index dropping marginally. The fall in average returns was less than 1%, for both investors with hedged and unhedged currency positions.

Source: van Eyk. Returns in local currency

The financial sector led the US market lower as major banks were sold down again in response to ongoing fears around credit losses. The S&P 500 Index finished the month down 0.9%, but was still 3.5% higher for the year as a whole.

As has been the case for much of 2007, Eurpean markets were stronger than their American counterparts. A cut in interest rates in the United Kingdom contributed to a 0.4% improvement in the FTSE Index, whilst the German DAX was 2.5% higher.

Once again the Japanese market dissapointed investors, with the Nikkei Index falling by 2.4%. The Nikkei has fallen some 16% over the past 6 months, with Japanese financial instiutions being caught up in concerns over credit quality.

It was another solid month for emerging markets with China, in particular, bouncing back after some recent corrections. The MSCI Emerging Market Index was 1.1% higher, brinigng the annual rate of growth to 25%.

Bond yields drift higher

Whilst remaining concerned over the outlook for inflation, the Reserve Bank left overnight cash interest rates unchanged at 6.75% during December. Many in financial markets, though, are still predicting a rise in interest rates following the next meeting of the Reserve Bank Board in February.

With inflation concerns and the case for monetary policy tightening strengthening, bond yields moved higher last month. The Australian 10-year Government bond yield finished the month at 6.3% after opening at 6.0%. The rise in yields meant lower bond prices, which created slightly negative returns for Australian fixed interest investors.

Source: Reserve Bank of Australia

Overseas longer-term yields were generally flat, with the US 10-year bond yield remaining at around 4%, after falling significantly in the previous month. Concerns of economic weakness and the lowering of short-term interest rates by the Central bank continue to hold down longer term US interest rates.

Listed property sold down again

December was a particularly tumultuous month for listed property trusts. A fall of 82% in the price of Centro Properties Group triggered another sell-off in the sector, which lost 6.8% over the month. After a string of very strong years, listed property had a poor 2007, finishing the year 8% down.

Source: ASX / S&P

Centro’s price decline stemmed from news that the company was having difficulty re-financing a major lending facility that was up for renewal. Although many other property trusts were sold down in response to this news, there was no evidence that other trusts were facing similar difficulties. It is likely though, that funding costs for the sector have increased as a result of recent events and this will squeeze earnings moving forward.

Concerns over the outlook for listed property trust vehicles were not just local in nature, with overseas listed entities also being impacted by the news of Centro’s difficulties. Global listed property was 4% lower in December.