2009/10 – The Financial Year in Review
July 2, 2010
After the Global Financial Crisis that seemed to dominate 2007/08 and 2008/09, in 2009/10, the focus has now shifted to shifted to sovereign debt issues. In November last year the concern was that Dubai would default on its debt obligation. The focus then shifted to Greece with worries that contagion would spread to other countries such as Portugal, Ireland, Spain, Italy and Iceland.
As well, over the past year investors have also been concerned by other issues such as a volcanic ash cloud across Europe grounding airlines; US authorities initiating criminal proceedings against Goldman Sachs; the UK election led to formation of a coalition Government; and the worst global oil spill occurring in the Gulf of Mexico.
A brief summary of the major economic and financial issues appears below:
- The global economy has strengthened over the past year, but while Asian countries have led the way, European economies have struggled. Overall the US economy continues to improve, but against a lofty budget deficit, high unemployment and an uncertain path for the construction sector are the main constraints. China remains the heavyweight of the global economy.
- After two years of declines, global sharemarkets rebounded in 2009/10. But some of the gloss was taken off the recovery in late April as investors fretted about high debt levels in Europe. Overall the Australian All Ordinaries index lifted by 9.5 per cent in 2009/10 after sliding by 26 per cent the previous year.
- In terms of total returns (capital growth and dividends), the All Ordinaries Accumulation index lifted by 13.7 per cent in 2009/10 after retreating 22.1 per cent in the 2008/09 year. Over the past seven years, total returns have averaged 11.6 per cent a year – consistent with the longer-term 25-year average performance.
- The major sharemarkets of North America and Europe generally out-performed Australia over 2009/10 but Japan under-performed. The US Dow Jones lifted by 15.7 per cent, the S&P 500 gained 12.1 per cent and the Nasdaq rose by 14.9 per cent. In Europe the UK FTSE grew by 15.7 per cent and the German Dax gained 24.1 per cent. But the Japanese Nikkei fell by 5.8 per cent over 2009/10.
- In Australia, the record economic expansion looks set to move into its 20th year. Responsive monetary policy, government stimulus and a resilient labour market ensured that the economy kept growing over the past year. But over the next twelve months the private sector will need to take control of the steering wheel from the public sector, while China will again be fundamental to prospects.
- Interest rates: After rate rises in October, November, December, March, April and May, The Reserve Bank believes that interest rates are now back at ‘normal’ levels with the cash rate at 4.50%. However the average bank variable housing rate stands at 7.40 per cent, above the long-term average or “normal” rate of 7.15 per cent.
- Aussie dollar: The fortunes of the Aussie dollar are generally tied to perceptions about the health of the global economy and that trend continued in 2009/10. The Aussie dollar started the financial year around US80 cents and finished the year just over US87 cents. But after dipping to lows around US77.50 cents in mid July 2009 it rallied to highs above US92 cents in October as the global economy strengthened.
- Other asset classes: The interesting point is that you would have made money over the past year whether you placed the funds in residential property, bonds or cash. At this stage returns on residential property in 2009/10 are likely to have grown by around 15 per cent with returns on bonds lifting around 6 per cent and cash returning close to 3.7 per cent.
- Over the past seven years Australian shares have out-performed other asset classes, growing just over 12 per cent versus just under 10 per cent for residential property, and just under 5.5 per cent for both bonds and cash. Of course if you rejig the investment period by a year or two you do get slightly different results. For instance over the past nine years average annual returns on residential property were almost 12 per cent versus around 9 per cent for shares.
Future Issues:
- High budget deficits and debt levels in Europe, uncertainty about the sustainability of strong growth in China and question marks about the US economic recovery will be the main issues in 2010/11.
- Overall the International Monetary Fund expects the global economy to grow by 4.2 per cent over 2010, slightly above the 30-year average of 3.8 per cent. China is expected to contribute almost a quarter of global growth this calendar year.
- Across the globe, policymakers will be focussed on different issues over the coming year. In Australia, the emphasis will be on maintaining prosperity over the coming year. In Asia, policymakers will be focussed on preventing economies from over-heating. In the US, the goal will be on sustaining the economic recovery. And in Europe, policymakers will have to satisfy investor demands to trim budget deficits while at the same time ensuring that economies don’t slip back into recession.
- The health of the global economy is very much dependent on China. The International Monetary Fund expects the global economy to grow by 4.2 per cent with China accounting for almost 0.9 percentage points of that growth pace. So far the economic news from China is encouraging but the challenge will be to keep inflationary pressures at bay and preventing a build-up of irrational exuberance in the property sector.
Please Note:
This publication has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you need to consider (with or without the assistance of an adviser) whether this information is appropriate to your needs, objectives and circumstances. This information is provided for persons in Australia only and is not provided for the use of any person who is in any other country.
