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Markets and performance - March 2008
10/04/2008
March proved to be yet another volatile month for global share markets, even as the US Federal Reserve lowered interest rates and pumped an additional $200 billion into the US financial system to help shore up banks battered by recent credit losses.
At a glance
- Global share markets continue to weaken
- US Federal Reserve cuts interest rates for the third time this year
- Australian share market closes lower for the fifth month in a row
Global share markets remained under pressure throughout March amid continued market volatility and question marks over the outlook for the US economy. But perhaps the biggest news in financial markets over the month was the bail out of US investment bank, Bear Stearns.
Bear Stearns was one of the first high profile US financial institutions to feel the impact of what’s become known as the ‘global credit crunch’. It was the collapse of two of their hedge funds last year that put the spotlight on companies that used considerable debt to generate returns in areas such as hedge fund management and mortgage securities trading.
JPMorgan, backed by the US Federal Reserve (Fed), initially offered just $2 a share for the company, though the offer was later revised to around $10 a share. The effect the deal had on the market was significant, with financial stocks tumbling as investors began to wonder just how many other companies out there may be in line to suffer a similar fate.
Despite most global share markets ending the month lower, there were still some good gains across many of BT’s international share funds. The BT International Fund returned 0.90% (after management fees) in March, the BT European Share Fund was up 2.71% and the BT American Fund returned 0.72%. The BT Japanese Share Fund was also up 0.34% but the BT Asian Share Fund recorded negative growth, returning -3.64% for the month. It is worth noting that the continued strength of the Australian dollar also weighed on returns over the month.
Weaker global share markets were also positive for bond markets as investors once again offloaded shares in favour of the relative safety of government debt.
The Fed cuts again
The Fed lowered its benchmark interest rate a further 0.75% in March, taking the official Fed Funds rate to just 2.25% as policy officials try to prop up a weakening economy and restore faith in the US financial system.
Recent economic data out of the US shows that growth in consumer spending, which accounts for around 70% of US economic activity, has slowed and that the labour market has also weakened. At the same time, tougher credit conditions and the ongoing contraction in the US housing market are likely to continue to weigh on economic growth over the next six months or so.
The Fed has now cut interest rates six times since August last year.
Elsewhere, the European Central Bank (4.00%), the Bank of England (5.25%) and the Bank of Japan (0.50%) all left their respective rates on hold.
Oil prices spike to record highs
Oil prices spiked to over US$111 a barrel in March – their highest level since trading began back in 1983 – amid continued US dollar weakness and OPEC’s decision not to increase its output.
OPEC, or the Organisation of Petroleum Exporting Countries, is a group made up of the world’s largest oil producers, including Saudi Arabia, Iran, Kuwait and Venezuela. Member nations account for around 66% of the world's oil reserves and around 35% of the world's oil production. Oil ministers from each country meet regularly to co-ordinate their respective oil production policies in a bid to maintain price stability.
In recent months, a number of world leaders, including US President George W. Bush, have been rather vocal in their opinion that OPEC needs to do more, including upping its level of output, to keep oil prices down, though their comments have so far fallen on deaf ears.
However, despite hitting record highs in March, profit-taking and concerns that weaker US economic activity will translate into weaker demand for oil meant prices fell away late in the month, eventually closing flat at around US$101 a barrel.
Australian share market weaker
The Australian share market was again weaker in March, with the S&P/ASX 300 Accumulation Index closing the month down 3.42%. It was the fifth month in a row that the local market has posted a negative return, this time driven largely by a weak lead from the US and the Reserve Bank of Australia’s decision to raise interest rates to 7.25%.
The weakness in the local market was reflected in the performance of some of our Australian Share Funds over the month. The BT Australian Share Fund returned -3.80% in March, the BT Imputation Fund was -3.43%, the BT Ethical Share Fund returned -3.65%, and the BT Smaller Companies Fund, which invests in companies outside of the ASX top 100, was -5.09%.
Australian listed property was also weaker over the month, with our BT Property Securities Fund returning -0.34%. Likewise, our BT Active Balanced Fund, which invests across a number of different asset classes, including Australian and international shares, bonds and listed property, closed March 0.95% lower.
Looking ahead
Economic data in the US has clearly weakened and is likely to get worse before it gets better so we can expect further market volatility in the near-term. Importantly, though, the Fed’s response to the deterioration in market conditions has been substantial and this should have the effect of limiting the chance of a long-term bear market. The Fed has already cut interest rates three times this year in a bid to maintain economic growth and the Bank appears ready to cut further if necessary.
The Australian economy should remain relatively robust compared to some of its global counterparts, though there are a couple of factors that will determine the direction of the local market in the medium-term. The first is the impact that any slowdown in the US will have on China. Australia has benefited considerably from Chinese growth in recent years so if that growth begins to slow, it will have an obvious effect on our own market.
The second factor is whether the Australian consumer is able to withstand the triple whammy of rising interest rates, higher household debt levels and falling share prices. We think that they can, though the risks obviously remain skewed to the upside.
Here at BT, we’ve stepped up our focus on ensuring that we have the right valued stocks and the right levels of diversification and risk within our portfolios, whether its Australian shares, listed property or fixed income, and we will continue with this strategy in the current market environment.