Markets and Performance - December 2007

The last month of 2007 proved to be a mixed one for global share markets as investor concerns mounted over the rising threat of a recession in the US. Five of the world’s central banks tried to alleviate these concerns by coming together and implementing a plan to pump extra cash into the global economy, but whether this will be enough to quell investor fears is yet to be seen.

At a glance:

  • Share markets worldwide were mixed in December on rising fears of a US recession
  • Both the Australian market and the Australian dollar closed 2007 higher
  • What's ahead for 2008 

Global share markets mixed

December was a mixed month for global share markets as investors continued to worry about the usual suspects – weakness in the US housing market, the fallout from the global credit crisis, and the threat of a recession in the US. Bourses in the US and Japan were weaker, while share markets in Europe, the UK and China made positive gains over the month.

Perhaps the most important news in December, though, was the joint effort by some of the world’s leading central banks to ease the credit squeeze that’s been threatening global growth in recent months. In the biggest act of international economic co-operation since the September 11 terrorist attacks, the US Federal Reserve (Fed), Bank of England, European Central Bank, Swiss National Bank and the Bank of Canada combined to pump billions of dollars of additional cash into the global financial system to alleviate the pressures in short-term money markets. Central bankers took the action after interest rate cuts in the US, UK and Canada all failed to allay investor concerns that banks would curb lending, which could send the US into recession and hobble global growth.

But despite mixed returns in December, most of the world’s major share markets still managed to close the year in the black, though annual returns this year were not quite as good as in 2006.

Source: Datastream

Unfortunately for investors, weaker share market returns this year meant softer returns for some of BT’s international share funds in 2007. The BT International Fund returned -12.20% (after management fees) in the year to 31 December, while the BT American Share Fund and the BT Japanese Share Fund were down 0.30% and 15.81% respectively. By contrast, the BT European Share Fund returned 1.88% and the BT Asian Share Fund, which seeks out investment opportunities within the Asia region (excluding Japan), was up 16.58%. The BT Asian Share Fund benefited largely from its exposure to emerging markets like China and India where economic growth has remained solid.

Weaker global share markets also weighed on the performance of diversified funds, with the BT Active Balanced Fund, which can invest up to 32% in international shares, returning 3.85% in 2007.

The Fed cuts rates again

The US Federal Reserve lowered interest rates again in December, taking the official Fed Funds rate to 4.25%. The decision to cut rates came after recent economic data suggested that growth in the US is indeed slowing, reflecting the intensification of the housing correction and deterioration in financial market conditions. And with economic data continuing to weaken in early January, the question now is not whether the Fed will lower rates again at its next meeting, but by how much. The chances of a 0.50% move have been put as high as 68%, though it’s more likely that the Bank will cut rates by just 0.25%.

The Bank of England also cut interest rates in December – its first cut in two years – in a bid to stop rising borrowing costs from derailing economic growth. The Bank’s nine-member Monetary Policy Committee agreed to reduce rates by 0.25% (to 5.50%). Elsewhere, the European Central Bank and the Bank of Japan left rates on hold – at 4.00% and 0.50% respectively.

Oil prices rally into year-end

Oil prices gained a further 8.2% in December amid ongoing supply concerns and further tensions between Turkey and suspected Kurdish rebels in Northern Iraq. Oil ended the year 57.1% higher at US$95.99 a barrel, though renewed violence in Nigeria – Africa’ biggest producer – saw prices move even higher in early January, with crude hitting the US$100 mark for the first time ever. We can probably expect oil prices to remain at high levels throughout 2008, assuming of course that the US economy skirts recession. This is because any slowdown in global growth would have a significant impact on oil demand, thus having the effect of pushing prices lower.

Australian share market weaker

The Australian share market closed out the year on a weaker note, with the S&P/ASX 300 Accumulation Index down 2.64% in December. The local market was dragged lower by the listed property sector after Centro Properties became the first major (local) casualty of the global credit crisis. Centro, which in May 2007 was valued at $8.5 billion, lost nearly 90% in the final weeks of the year, reducing its value to less than $900 million. Weakness in mining stocks also affected performance as the softer outlook for global growth weighed on commodity prices.

Source: Datastream

Unfortunately for investors, weakness in the local market meant softer monthly returns for some of BT’s Australian share funds, though these funds continue to perform well over the long-term. The BT Australian Share Fund returned 17.12% in the year to 31 December 2007, the BT Imputation Fund was up 17.74%, the BT Ethical Share Fund returned 16.54%, and the BT Smaller Companies Fund, which invests in companies outside of the ASX top 100, was up 18.71%.

Australian dollar softer in December

The Australian dollar (A$) was slightly weaker against the US dollar in December, but still managed to close the year 11.2% higher at US$0.8766. The strength in the A$ throughout 2007 came largely on the back of high commodity prices and interest rate cuts in the US, which made the higher yielding A$ an attractive option for investors. Going forward, the possibility of a slowdown in global growth will likely mean a rougher ride for the A$ in the near-term, though it looks set to remain at high levels.

What about 2008?

Our outlook for global markets remains positive. Although it’s inevitable that market volatility will continue, we still expect global growth to hold up, though this will depend largely on whether the US economy can avoid a recession. The housing market in the US remains very weak and this has only been exacerbated by the ongoing problems in global credit markets. Although the US Federal Reserve has acted to allay investors’ fears of a recession occurring by cutting interest rates and pumping additional money into the economy, the chance of a recession has nonetheless been put at between 30% and 50%. If the US was to go into recession, it would obviously have a significant knock-on effect on the rest of the global economy. But whether this happens or not, we think it’s important that investors focus on their long-term investment horizon and try to avoid getting too caught up in the momentum of short-term market movements.

Here in Australia, we see the market as being fully valued, though we believe there are enough pockets of good value out there to remain invested. The resources ‘theme’ that’s supported the local market in the last few years should continue, though admittedly it is becoming harder to find value in resources stocks as more and more people buy into this ‘theme’. We actually think that the best stocks in the market at the moment are probably those that have fallen off the radar; mainly good quality companies with low or reasonable valuations that aren’t held hostage to what’s been happening in the US and the rest of the world. In the current market environment, we also believe that portfolio diversification is important. To this end, BT benefits from one of the largest investment teams in the industry, meaning that we’re able to look at all sectors of the market; not just resources and what’s happening in China.

 

To see the most recent performance figures available for a specific BT fund, view the Performance page on our website.