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Markets and performance - May 2008
11/06/2008
May proved to be a mixed month for global share markets, with some building on last month’s gains while others giving some back. Oil prices continued to rally, as did the Aussie dollar, and the local share market made it two positive months in a row.
At a glance
- Global share markets mixed in May
- The Reserve Bank of Australia leaves interest rates on hold at 7.25%
- The Aussie dollar hits a 25 year high against the greenback
Global share markets mixed
Global share market performance was mixed in May, helped on the one hand by speculation the US economy had avoided a recession but hurt on the other by rising oil prices and stagflation fears in the US. Stagflation is the term used to describe an environment of slow economic growth and rising prices (inflation), and is a situation investors will be hoping the US Federal Reserve (Fed) can avoid.
The US and Japanese share markets closed the month higher, while markets in the UK and Europe finished slightly in the red.
Global Share Market Performance - 2008
Source: Premium Data
The mixed performance of global share markets meant similarly mixed returns for many of BT’s international share funds. The BT International Fund returned -0.09% (after management fees) in May, while the BT European Share Fund was up 0.32%, the BT American Fund returned 0.73%, the BT Japanese Share Fund was up 2.16% and the BT Asian Share Fund returned -3.06%. It’s worth noting that the strength of the Australian dollar continues to weigh on international share fund returns.
Oil hits US$134 a barrel
Oil prices continued their remarkable run in May, pushing past the US$134 a barrel mark for the first time.
West Texas Intermediate Oil Price (US$ a barrel)
Source: Energy Information Agency
The strength in oil prices has been one of the big surprises this year and it would seem that, short-term fluctuations aside, the long-term trend is up. Some commentators expect prices will reach US$200 a barrel within the next five years.
The main reason for this is that oil demand this decade has far outweighed
supply, and this looks set to continue due to fewer new oil discoveries and a
lack of infrastructure investment by the world’s largest oil producers. In
fact, several big investment banks, including Goldman Sachs, have significantly
raised their forecasts for oil prices in recent months, citing increasing
demand as a major factor.
It’s not just increasing demand contributing to the rise in oil prices this
year. Other factors helping to push prices higher include a weaker US dollar,
speculative buying by hedge funds, geopolitical tensions in the Middle East,
and OPEC’s decision not to increase their production quotas.
Oil prices closed the month at US$127.35 a barrel, an incredible 99% higher than this time one year ago.
The RBA leaves rates on hold
The Reserve Bank of Australia (RBA) left interest rates on hold at 7.25% following their early June meeting. The decision was widely expected after recent economic data hinted that the Bank’s earlier rate hikes were beginning to have the desired effect (of slowing the economy). High inflation will no doubt remain a concern for the RBA, but assuming domestic demand continues to slow as expected, it would seem interest rates are likely to remain on hold in the near-term.
Elsewhere, the Bank of England (5.00%), the European Central Bank (4.00%) and the Bank of Japan (0.50%) all left their benchmark rates on hold in May, while the US Federal Reserve didn’t meet. The Fed next meets on 24 June and is expected to leave rates on hold at 2.00%, pending any significant deterioration in the outlook for the US economy.
Aussie dollar hits 25 year high
The Australian dollar climbed to US$0.9653 cents in May, its highest level since way back in February 1983. Since the beginning of the year, the local currency has risen 9% against the US dollar (US$) and we could now see it reach parity with the greenback within a few months thanks to continued US$ weakness, still strong commodity prices and high domestic interest rates.
Australian Dollar vs US Dollar
Source: Premium Data
Two in a row for the Australian market
The Australian share market posted its second monthly gain in a row in May, with the S&P/ASX 300 Accumulation Index returning 1.71%. The gain came mostly on the back of a solid rise in resources stocks, which rallied amid speculation that Chinese aluminium giant, Chinalco, had bought a significant stake in BHP Billiton, the world’s biggest miner.
So far this year, the local market is down 9% after having fallen as much as 19% just a few months ago.
S&P/ASX 300 Accumulation Index - 2008
Source: Premium Data
The strength in the Australian market also meant further good gains for many of BT’s Australian share funds over the month. The BT Australian Share Fund returned 1.06% in May, the BT Imputation Fund was up 0.68%, the BT Ethical Share Fund returned 0.57% and the BT Smaller Companies Fund, which invests in companies outside of the ASX top 100, was up 3.51%.
Australian listed property was weaker in May, with the BT Property Securities Fund returning -8.79%. The BT Active Balanced Fund, which invests across a number of different asset classes, including Australian and international shares, bonds and listed property, closed the month 0.26% higher.
Looking ahead
The turnaround in investor sentiment we saw last month has been dented by the threat of rising inflation and slower economic growth ahead. There have also been some renewed concerns over the real extent of the global credit crunch and this, too, has weighed on confidence. Nonetheless, investors do seem prepared to take on additional risk and this should have a positive effect on the direction of global share markets in the near-term. We maintain our view that investors need to continue to exercise caution, particularly as we wait to see whether or not the Fed has done enough to kick start the US economy.
Our outlook for the Australian market remains the same. We expect the local economy to remain relatively robust compared to some of its global counterparts, though two key factors are likely to influence the direction of the market over the medium-term. The first is the impact a slowdown in the US will have on China. Australia has obviously benefited considerably from Chinese growth in recent years so if that growth begins to slow, it will have a significant impact on our own market.
The second factor is whether the Australian consumer can withstand the ‘triple whammy’ of higher interest rates, higher household debt levels and falling share prices. We believe they can, though the risks will obviously remain skewed to the upside.
At BT, we will continue to focus on having the right valued assets and the right levels of diversification and risk within our portfolios, whether it’s Australian shares, listed property or fixed income.
Find out how BT’s other managed funds performed during the month of April by visiting the performance section of the BT website.