Market Overview Dec 2014 Qtr

Australian Shares

The December quarter was dominated by falling commodity prices and the impact of this on the Australian economy.

Equity Market Performance

In terms of equity market performance, resource companies were sell targets with the ASX resource sector dropping 13 per cent over the quarter.

Despite dramatic falls in resources the overall Australian equity market still managed to deliver a reasonable gain of 2.94 per cent as investors chased higher yielding stocks.

Commodity prices

Most major commodity prices experienced sharp falls over the quarter, with oil being the most heavily traded commodity, falling 40 per cent in US dollar terms. From an Australian perspective the continued fall in the iron ore price from $80 per tonne to just under $70 per tonne was more concerning.

The fall in commodity prices is not all bad news for the Australian economy. Some positives include:

  • the Reserve Bank of Australia (RBA) is likely to keep cash rates on hold or possibly cut
  • the fall in the Australian dollar to US$0.82 is a benefit to many import competing and export industries
  • falling oil price puts more income back into the pockets of consumers through lower petrol prices

Valuation multiples for the Australian equity market rose marginally over the quarter with the forward price earnings ratio pushing just above 15 times, reflecting the modest rise in stock prices and flat earnings expectations.

International Shares

Sharply falling oil prices, lower global bond yields, and a strengthening US dollar were dominant influences on investor sentiment in the final quarter of 2014 and for much of the year as a whole.

Global Equities

Global equities delivered positive returns in a volatile quarter. The depreciation of the Australian dollar saw unhedged returns do even better.

In Australian dollar terms, the MSCI AC World ex Australia Index returned 7.49 per cent for the quarter.

While the US economy and financial markets continued to strengthen, growth in much of the rest of the world disappointed. Poor global growth and excess supply sent oil prices tumbling, further complicating the picture for energy-exporting economies.

Growth and monetary policies meant the US dollar strengthened versus most major currencies.

Consumer Discretionary, Utilities, and Information Technology stocks performed best, whilst Energy stocks performed worst by far, hurt by the sharp decline in crude oil prices.

The US Federal Reserve (Fed) ended its quantitative easing programme but other central banks continued to ease monetary policy.

The S&P 500 performed well despite some concerns over interest rate rises. Equities were supported by hopes that the lower oil price would help sustain the consumer-led recovery.

Eurozone equity returns

Eurozone equity returns were virtually flat. Macroeconomic news remained downbeat with disappointing news from Germany’s industrial sector early in the quarter. The weak data fuelled hopes that the European Central Bank could soon start buying sovereign (government) bonds, increasing the supply of money into economy.

Japanese equities

Japanese equities gained after further monetary policy easing from the central bank sent the yen lower.

Emerging market

Emerging markets posted negative returns. Russia was particularly weak amid deteriorating economic data, the falling oil price and pressure on the rouble. An interest rate cut supported Chinese equities.

There were clear divergences between market returns across the emerging market universe.

China, India and Turkey were amongst the select few that produced positive returns in Q4. In contrast, Greece, Russia, Brazil and countries in the Middle East suffered heavily from a range of issues, with the latter three in particular suffering from the relentless oil price drop.

The MSCI Emerging Markets Index gained 2.11 per cent in Australian dollar terms.

Fixed interest

The fourth quarter continued to be characterised by the growing disparity between the economic and monetary policy outlook between the main economies. A slowdown in global demand and lower inflation expectations have created conditions for further monetary easing in 2015.

Australian bonds returned 3.96 per cent over the quarter as measured by the Bloomberg AusBond Composite Bond Index.

International bonds returned 2.90 per cent as measured by the Barclays Capital Global Aggregate Bond Index ($A hedged) during the quarter.

The US Federal Open Market Committee’s (FOMC) December statement shows a change in language regarding the rate hike and is more optimistic about the labour market, indicating the Fed would increase rates in 2015.

Conversely, other main economies are considering increasing their monetary easing programs.

Domestically, Australian bond yields decreased sharply. The main drivers were the weak Q3 GDP results and the fall in commodity prices offset by an increase in total employment in November. Business and consumer confidence levels dropped.


The RBA left the cash rate on hold at 2.5 per cent with the possibility of an ease in policy through 2015.
Commentary from the RBA Governor regarding the still high current levels of the Australian dollar will leave room for further easing if required.


The property securities market surged during the quarter ending 31 December 2014 with most sectors benefiting from declining bond yields and improving real estate fundamentals.

Large volumes of capital have been allocated to the sector by investors looking to enjoy relatively high income returns and increasing market values.

Indexes at 31 December 2014

Asset class Index 3 month (%)

  • Australian shares S&P/ASX 300 Accumulation Index: 2.94%
  • International shares MSCI All Country World ex-Australia Index ($A): 7.49%
  • Australian fixed interest Bloomberg AusBond Composite Bond Index: 3.96%
  • International fixed interest Barclays Capital Global Agg Bond Index ($A hedged): 2.90%
  • Australian property S&P/ASX 300 A-REIT Accumulation Index: 11.31%
  • International property UBS Global Real Estate ex-Aust Index ($A hedged): 12.72%
  • Cash Bloomberg AusBond Bank Bill Index: 0.69%

Source: Morningstar, BNP