Markets and performance - April 2008

08/05/2008

Global share markets started the second quarter of 2008 much better than the first, rallying strongly throughout April to take back some of the losses suffered earlier in the year. Markets were helped along by a significant drop in market volatility as investors rediscovered their appetite for risk.

At a glance

Global share markets post strong gains in April
The Reserve Bank of Australia leaves interest rates on hold at 7.25%
Australian share market closes higher for the first time this year

Global share markets up strongly

Global share markets rallied strongly in April amid speculation that the worst of the global credit crisis may be over and some better-than-expected earnings results in the US. The US share market closed the month 4.8% higher and this had a positive knock-on effect on share markets in the UK, Europe and Asia.

Click on image to enlarge (opens in a new window)

Also contributing to the gains over the month was a significant drop in market volatility. The Chicago Board Options Exchange’s Volatility Index, widely regarded as the best measure of market volatility, fell 19% in April as investors regained their appetite for risk.

Click on image to enlarge (opens in a new window)

Stronger global share markets also had a positive effect on many of our international share funds over the month. The BT International Fund returned 1.96% (after management fees) in April, while the BT European Share Fund was up 1.03%, the BT American Share Fund returned 2.25%, the BT Japanese Share Fund was 2.89% and the BT Asian Share Fund returned 4.13%. It is worth keeping in mind, though, that the strength of the Australian dollar, which is still trading at historically high levels, continues to weigh on international share fund returns.

IMF cuts global growth forecasts

Interestingly, the gains in global share markets came despite the International Monetary Fund (IMF) cutting its forecasts for global growth this year. According to the IMF, global growth will slow in 2008, led by a sharp slowdown in the US as it undergoes its worst financial crisis since the Great Depression.

The IMF expects world growth to slow to 3.7% in 2008, down from the 4.2% it forecast in January. Furthermore, it believes there is a 25% chance that the global economy will record growth of 3% or less in 2008 and 2009, which is equivalent to a global recession.

Bond markets weaken

The turnaround in global share markets had a negative impact on bond markets in April. Bonds have benefited from the downturn in global share markets in recent months as investors fled riskier assets in favour of the relative safety of government debt. The yield on US 10-year bonds rose 30 basis points over the month to close at 3.73%, while the yield on Australian 10-year bonds closed 20 basis points higher at 6.24%.

Importantly, credit markets were stronger in April, benefiting largely from speculation that the worst of the global credit crunch is now behind us. This change in investor sentiment came about as the US Federal Reserve implemented a number of measures that effectively reduced the fear of problems spreading further than they already have over the last nine months or so.

Oil at US$120 a barrel

Oil prices continued to rally throughout April, supported in part by continued US dollar (US$) weakness, renewed tensions between the US and Iran, and supply disruptions in Nigeria, Africa’s biggest oil producer. After hitting the US$120 mark for the first time ever, oil ended the month 13% higher at US$114.87 a barrel and is now 75% higher than this time a year ago.

The Fed cuts again

The US Federal Reserve (Fed) lowered its benchmark interest rate to just 2.00% following its latest meeting on 30 April. The 25 basis point move had been widely expected so the focus for investors was more on the Fed’s accompanying statement, which hinted that this latest rate cut could be the last. The Bank said that, ‘The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time.’ So, pending a significant contraction of the US economy in the near-term, it would seem that US interest rates are on hold for now.

By contrast, the Reserve Bank of Australia (RBA) left interest rates on hold at 7.25% following its meeting on May 6, though the decision was arguably a finely balanced one. On the one hand there is increasing evidence that the RBA’s recent rate hikes are having an impact on domestic demand, while on the other, inflation continues to sit outside the Bank’s comfort zone. The Bank will now wait until its June meeting to determine if domestic demand really has slowed. If it has, that should have a positive impact on inflation and eliminate the need for any further rate hikes. However, if demand remains strong, it’s likely that we’ll see one more rate rise this year, taking the official cash rate to 7.50%.

Elsewhere, the Bank of England cut interest rates from 5.25% to 5.00% as it continues to battle rising inflation, while the European Central Bank (4.00%) and the Bank of Japan (0.50%) left rates on hold.

Australian dollar hits US$0.95 cents

The Australian dollar (A$) moved above the US$0.95 cent mark in April, taking it to its highest level in 24 years. General US$ weakness, stronger commodity prices and a widening interest rate differential between here and the US all combined to push the local currency higher.

While the A$ is likely to experience a rougher ride over the next six months or so, it should nonetheless remain at elevated levels as the impact of slower global growth on commodity prices continues to be offset by relatively high local interest rates.

Australian market posts first monthly gain of 2008

The Australian share market posted its first monthly gain of the year in April, with the S&P/ASX 300 Accumulation Index closing the month up 4.5% on the back of higher commodity prices and a strong lead from the US. The local market is now down 11% so far this year after having fallen as much as 19% just six weeks ago.

Click on image to enlarge (opens in a new window)

For investors, the strength in the Australian market meant good gains for many of our Australian share funds over the month. The BT Australian Share Fund returned 4.64% in April, the BT Imputation Fund was up 5.19%, the BT Ethical Share Fund returned 4.92%, and the BT Smaller Companies Fund, which invests in companies outside of the ASX top 100, was up 3.27%.

Australian listed property was also stronger in April, with our BT Property Securities Fund returning 4.13%. Similarly, our 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 2.71% higher.

Looking ahead

Investor sentiment has turned more positive lately, buoyed by speculation that we may have seen the worst of the global credit crunch that has crippled financial markets in recent months. Whether we’re out of the woods just yet, though, is hard to know for sure, but investors certainly appear to have regained their appetite for risk and this has had a positive effect on the direction of global share markets. However, the outlook for the global economy has obviously weakened so we believe that it’s important for investors to continue to exercise caution in the near-term.

Our outlook for the Australian market hasn’t changed. 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 that any 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 that 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.