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Hewison Insights
Australian share market

Economic Update

Simon Curtain
Partner/Private Client Adviser
24 Mar 2014

The Australian share market is flat so far this calendar year. In early January it was sitting at around 5,300 points, only to dip five per cent in February and then back to 5,300 in mid-March.

During this period, the market peaked at over 5,400 points – a five year high.

So why did the market dip in February?

The United States is currently printing money (quantitative easing) to boost economic growth. Earlier this year, the US Federal Reserve decided the economy is ready to ‘stand on its own two feet’ and signalled it will begin scaling back (or tapering) its quantitative easing strategy. As usual, equity markets over-reacted to this news and the market dropped accordingly in February.

While overreaction in the share market is quite normal, it does demonstrate how share markets can be volatile over short time frames. However, when approached with the long term in mind, they can provide solid growth and a reliable income stream.

What impact will tapering have?

The US has the world’s largest economy. As such, investors see it as somewhat of a safe haven for money and investments. However, with US rates at an all-time low, there is not adequate incentive to invest in US Bonds. Investors have instead directed money to other countries where they can obtain a more competitive rate on their funds.

The decision to begin tapering is a clear sign that the US economy is improving– which in turn could over time see increases in bond returns and interest rates in the US.

With the prospect of increasing interest rates, the US has again become an attractive investment. As a result, we have seen large amounts of money withdrawn from countries around the world and deposited back to the US.

What can we expect for the rest of this year?

Hewison’s outlook for the rest of 2014 can be summarised as follows:

• The tapering of the Federal Reserve’s quantitative easing is now clearly outlined and largely priced into equity markets. Underlying fundamentals such as company earnings will now drive markets, rather than hearsay over whether or not the Federal Reserve will ease further

• Economic growth in the United States will pick up, driving US share markets and the US dollar higher

• Emerging markets and currencies will be volatile, as cash moves back to the US seeking a higher and more stable return

• Interest rates in Australia are likely to remain on hold this year or move even lower, to promote a rebalancing of the economy away from resources to other sectors such as education and in-bound tourism

We continue to monitor the global landscape and identify opportunities, while keeping our clients’ long term goals and objectives at the centre of our business practice.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.