Avenue: Economic Report

The Monthly Market Commentary explains developments over the most recent month, including local and global economics, Australian & International shares, property and fixed income markets.

Volatility remained the dominant theme throughout the month of December, with soft US economic data and liquidity concerns impacting the market. The benchmark S&P/ASX 300 Accumulation Index fell 2.64% but finished the year up 16.22%.

The effects of defaults on subprime loans and a global shortage of credit, prompted several sharp sharemarket falls during the latter half of 2007. Other factors included the stronger AUD, crude oil nearing US$100 a barrel and high domestic interest rates as compared to the US, UK and Europe.

Economic indicators remained strong during December. The Australian Bureau of Statistics (ABS) released the Housing Finance approvals for October (released 10 December). The total value of housing finance rose 1.70% in seasonally adjusted terms. Owner-occupied home loan commitments increased 1.10% while investment housing commitments rose 2.90% seasonally adjusted.

On 13 December, the ABS released the October figures for labour force in Australia. Seasonally adjusted employment increased by 52,600 and the unemployment rate increased by 0.20% to 4.50%. The participation rate in November was 65.30%, compared with 65.00% in October.

In the US, the Federal Reserve cut the official interest rate by 0.25% to 4.25% in mid-December, in an attempt to ease econo mic fallout associated with sub-prime mortgages and tightening credit conditions . Economic indicators pointed to a further weakening of the US economy in December as consumer confidence fell 19%. Business sentiment and factory activity, as measured by the US Institute for Supply Management (ISM) fell to 47.70%, down 3.10% points from November's 50.80%.

In addition, lower then expected retail holiday sales and a higher unemployment rate for December will keep pressure on the Fed to cut interest rates again when it meets in mid-January.

The Australian dollar (AUD) had mixed results against the major currencies during December. It fell by 0.55% against the US dollar, to close at US$0.8816. Volatile equity markets and stronger than expected US November CPI contributed to the US dollars strength during the period.

The AUD was also weaker against the Euro, falling 0.57% for the period, but strengthened against the Japanese yen (0.96%) and the British pound (2.68%).

The S&P/ASX 300 Accumulation Index fell 2.64% in December. The smaller companies sector, as measured by the S&P/ASX Small Ordinaries Accumulation Index, fell by 2.37% for the month, slightly less then the broader domestic market. It continues to outperform the large cap market for the last 12 months, returning 17.05% for the period.

Global Equities was mixed for the month of December. The MSCI World Accumulation Index fell by 0.55% in AUD terms. This was also reflected in the FTSE100 Accumulation Index (A$) which was 2.05% lower for the period. However the S&P 500 Composite Accumulation Index rose by 0.02% in AUD terms. Over the12 months to the end of December, the MSCI World Accumulation Index was down 1.65% in AUD terms.

In Japan, the Nikkei ended the month down 2.38%, while China’s Shanghai’s Composite market rose 8.00% in local currency terms.

European markets were mixed with the German DAX up 2.50%, while the French CAC 40 was down 1.00% in local currency terms.

The S&P/ASX 300 Listed Property Accumulation Index declined sharply (6.65%) over the month, underperforming the broader equity market. Hardest hit stocks were Centro Property Group and Centro Retail Group on credit concerns. Overall, the S&P/ASX 300 Listed Property Accumulation Index is down 8.36% over the past year.

The UBS Global Real Estate Investors Index also declined sharply in December, falling by 4.37% in AUD terms, due to negative sentiment particularly in the US, UK and Europe. Over 12 months the UBS Global Real Estate Investors Index was down 16.86% in AUD terms.

The Australian bond market weakened over the month, falling 0.16% (as measured by the UBS Warburg Composite Bond Index). The UBS Warburg Bank Bill Index returned 0.60% for December. Over 12 months ending December, the bond and cash markets returned 3.46% and 6.73% respectively. The Lehman Brothers Global Aggregate (Hedged $A) strengthened 0.34%, returning 6.64% for the calendar year.

IMPORTANT NOTICE: The following relate to this document published by Lonsec Limited ABN 56 061 751 102 ("Lonsec") and should be read before making any investment decision about the product(s).
Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. If our General Advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each financial product before making any decision about whether to acquire a product.
Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, employees and agents disclaim all liability for any error or inaccuracy in, or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Avenue Capital Management, its officers, employees and agents make no representations or warranties in relation to the accuracy or completeness of the information or recommendations contained in this report and shall not be liable for damages or in any other way for misrepresentations, errors of fact and opinions suffered by any person who relies on the information, even if Avenue Capital Management, its officers, employees or agents have been negligent in compiling this report or in making any recommendation contained in it, except in any case where liability cannot be excluded pursuant to any law.

Avenue Capital Management ABN 98 094 986 562