Three consecutive years of sharemarket gains came to an end with the S&P/ASX 200 index registering modest losses of 2.1%. However, when dividends are included the market rose by 2.53% for the year making it the 11th year out of the past 13 that the market has risen in Accumulation terms highlighting the importance of dividends for local investors. Small Cap stocks outperformed in 2015 with the Small Ord’s (ASX100-300 stocks) rising by 6.2% outpacing the large caps for the first time since 2010 as investors chased growth that was elusive amongst the blue chips. The Australian market which lagged major markets for much of the year (given weaker commodity prices) bucked the trend to finish the year off strongly (rising 2.5% in December) as the seasonal Santa rally saw it outperform global markets that were softer following the US Federal Reserve’s (The Fed) first interest rate hike in almost a decade. Supported by record low interest rates consumer stocks lead the December rally as investor anticipate a strong Christmas sales period while the continued hunt for yield saw banks, telcos and property trusts outperform. Meanwhile, the resources and energy sectors lagged due to the structural imbalances of oversupplied markets that was further compounded by softer Chinese demand and a stronger US$ which makes commodities more expensive for consumers to purchase.
From a global perspective most major bourses closed well off their yearly highs delivering varied performances. For the year the MSCI Global Index fell by 2.7% (emerging markets the drag) while US indices were mixed and Europe and Asia markets fared the best given ongoing stimulus in those regions. US markets broke a six year winning streak to see the Dow Jones fall by 2.2%, the broader S&P500 fell by 0.73% however, and the technology heavy NASDAQ bucked the trend to lift by over 5%. European markets were a standout but performances were similarly mixed with Italian shares leading the gains up nearly 12%, Germany markets rose by 9%, Paris higher by 7% while shares in London were the laggard falling by 5% hurt by mining stocks. Asian markets finished the year strongly to see shares in Japan and China up by around 9% although shares in Hong Kong slide by more than 7%.
Despite all the negative headlines on China and commodity prices the Australia economy has been quite resilient in 2015 to see 344,000 new jobs created for the year (the most in almost eight years) and the unemployment rate fell to 5.8% (down from 6.1%) while wages grew by 2.26% in the year to September, a record (18-year) low. The Federal Government now expects a budget deficit of $37.4 billion in 2015/16 (2.3% of GDP), up from the earlier estimate of $35.1bn driven by lower income receipts following negative revisions to iron ore price assumptions. Australia’s population grew by 1.35% in the year to June, the slowest annual rate in nine years. Consumer confidence and business confidence and conditions are holding above long-term averages. Retail trade rose by 3.9% in the year to October, above the 5-year average of 3.7% driven by new car sales that held at record highs. Building approvals also held near record highs and Australian home prices grew by around 8.5 % (skewed by double digit gains in Melbourne and Sydney) in 2015 after lifting by 7.9% in 2014.
2015 was a messy year for investors as worries about China, emerging markets, The Fed and a slump in commodity prices (especially iron ore down 40% and oil fell by 30%) saw local shares under pressure. Australia’s weakening trade balance and subpar economic growth prompted the Reserve Bank of Australia (RBA) to cut the cash rate by 0.25% in both February and May to leave it at record lows of 2%. Cash and Term Deposit rates fell (becoming an even less attractive investment) and investors in turn chased higher yielding stocks helping push the market to 7 year highs but failed to break through the physiological 6000 index points on several occasions. In May, the Australia government delivered a friendlier Federal Budget announcing a package to support small business and by the end of the year the budget deficit was revised higher with a return to surplus pushed back a year to 2020-21. The perennial fears of a Greek exit from the Euro came and went but it was the Chinese sharemarket that soared in the first half of the year to only plunge in the middle of the year on bubble fears that unnerved markets. In August, China fears peaked when a surprise devaluation of the Chinese Yuan saw global markets plummet with the Australia market falling more than 8% its biggest monthly fall since the GFC. In October, Westpac Bank surprised the market when it raised owner occupied and investment lending rates by 0.20% (offsetting increasing regulatory capital requirements and to partially offset equity raising dilution) and the other banks promptly followed meaning that the majority of homeowners received just one 0.25% rate cut in 2015 and the defacto tightening helped the RBA curb aggressive investor lending in the frothy east coast housing market. Finally, adding to the volatility in the second half of the year was the 40% slide in the iron ore price between September and December and concerns about a global oil supply glut that pushed Brent crude prices to 11 year lows.
The biggest news event for the year (apart from collapsing commodity prices) was the US Fed’s decision to lift interest rates (by 0.25%) contrary to an easing bias from other central banks. The move to hike had been well telegraphed after it was delayed in June and September due to a combination of soft US data and financial market volatility. So in the absence of any major economic shocks and with US economic data consistent with further labour market improvement and confidence that inflation would rise. The move was seen as a dovish hike in that while the Fed has hiked the commentary around it was relatively dovish with the Fed indicating that it expects future increases in the Fed Funds rate to be “gradual” and dependent upon further “actual and expected progress towards” its inflation goal of 2%. At its core the Fed’s move is positive as it signals confidence that the US economy is strong enough to withstand tightening however, the experience this year with further global growth disappointment, falling commodity prices and low inflation highlights that deflation remains a greater risk than inflation. This means that easy US monetary policy will likely be with us for some time and the rate hike was more symbolic than trend changing.
Globally the International Monetary Fund tips global economic growth to lift from 3.1% in 2015 to 3.4% in 2016 as the US recovery gathers pace and China continues to transitioning from production to consumption. The Chinese economy will likely grow ~6.5% over 2016 (down from 7% in 2015) but will still contribute around a quarter of global economic growth. Domestically we see Australia’s growth improving back towards 2.5% in 2016 and inflation remaining within the RBA’s desired 2-3% band. Unemployment is expected to lift from current levels but as economic growth picks up pace still stay ~6%. The Australian Dollar (A$) that fell by over 11% (from US$82c to US$73c) against the Greenback in 2015 looks to have similar downside in 2016 to ~US$65c as rising US interest rates helps maintain pressure on the A$ while the RBA currently maintains an easing bias meaning that they stand ready to act should the economy weaken. Merger and Acquisition activity was on the rise and we expect more of the same in 2016 as the weaker A$ draws offshore predators towards cheaper Australian listed companies. In 2015 we saw Japan Posts $6.5bn takeover for logistics firm Toll Holdings, Ports and Rail operator Asciano is the target of two suitors in an $9bn takeover offer while newly listed financial tech firms Veda ($2.5bn deal) and Oxforex (~$800m) have received takeover offers from North American firms well above their IPO prices just 2 years ago.
So despite another disappointing year for investors we remain optimistic that after two flat years on the Australian market is likely to pave way to better returns in 2016. While volatility is likely to remain high given the pace of Fed hikes, China growth and the ongoing rebalancing of the Australian economy there has been no major global bubble in real estate or business investment, inflation remains low, share markets are not overvalued (trading at ~15x earnings) and global monetary conditions are easy. Most growth assets, including shares are likely to provide reasonable returns in 2016 and for Australian shares (as highlighted in the chart below) the high 5% forecast dividend yield (7% grossed up to include franking credits) still represent an attractive investment when compared to the poor returns that term deposit rates will deliver running around 2.5% – barely keeping pace with inflation. So following a strong finish to the year we expect the ASX 200 to rise by around 5% by the end of 2016 to around 5500-5600 index points however, in Accumulation terms when dividends are added we see gains reverting closer to the long term averages of around 10% for the market.