Simon Coulter of Craigs Investment Partners reviews the markets’ performance in 2012 and looks ahead to 2013.
Sharemarkets around the world capped off an excellent year in 2012 with a strong run over December. The New Zealand market was up 24.2%, an outstanding performance and the best year since 2004. While international markets did well, they generally lagged local shares. Australian shares returned 18.8% over the year and US shares 13.4% (both in local currency terms).
The new year has begun in the same way, with markets continuing to push ahead and pick up where they left off in 2012. The NZX50 is already up over 3%, Australian shares have rebounded strongly and are up over 4% and the S&P500 in the US is up over 5% in 2013.
One key driver of the continuing strong run for markets was the outcome of political debates in the United States. Late in the year many positive economic reports were overshadowed by political dysfunction as lawmakers were unable to reach agreement on the ‘fiscal cliff’, a series of tax hikes and spending cuts that were due to begin early in 2013. Very late in December, US politicians eventually postponed making tough decisions on government spending and agreed to a series of modest tax hikes that will allow the US to avoid the full force of the steeper tax increases and sharp spending cuts that were set to take effect.
Economic data has also continued to suggest that an improvement in conditions is being felt in key economies like the US and China. In the US, recent employment data has been pleasing, as has housing market activity and durable goods orders. In China, recent data confirmed that economic growth for the final quarter of 2012 was 7.9%. This is an improvement on the 7.4% growth rate of the previous three months and marks a turnaround from several quarters of slowing growth.
These positive developments have been supported by the US corporate reporting season, which have also yielded generally solid results. Most companies have met or exceeded expectations.
We expect the NZ dollar to remain high and finish the year in the mid-eighties against the US dollar. With New Zealand sticking to traditional monetary policy initiatives (rather than printing money), as well as having higher interest rates than other countries, we expect the currency to be well-supported.
We expect the Official Cash Rate (OCR) to remain flat over 2013 with no rise until early next year. Australia is likely to reduce its cash rate further and this could see the NZ dollar increase slightly against the Australian dollar.
All of these points re-enforce our positive view on equities for the year ahead. We expect most markets to trend higher, despite some inevitable event driven volatility during the year. Interest rates will remain at record lows across most parts of the world, forcing investors into growth assets as dividend yields remain well in excess of alternative income opportunities. The local market looks solid with attractive yields (5.5% on average), a stable economic backdrop and modest earnings growth prospects.
Simon Coulter CA is a Senior Investment Adviser at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice.