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Outlook brightens somewhat as the ‘wow’ factor kicks in

JUNE was an interesting month. At a time when the general consensus of opinion was that we were seeing a slowing economy, we suddenly were hit with a raft of figures that introduced to economists the “wow” factor.

In one fell swoop we saw economic growth pick up and rises in job advertisements rise, consumer sentiment and housing finance commitments. In fact the only disappointing aspect of the month was a rise in unemployment. Hans Kunnen, head of Investment Markets Research for Colonial First State Investments, explains:

“Technically a recession occurs when gross domestic product falls for two consecutive quarters. In the December quarter 2000, GDP fell 0.6 per cent but, in the March quarter 2001, GDP posted a 1.1 per cent rise. Recession it seems, has been avoided,” Mr Kunnen said.

May was a reasonably good month for job advertisements. They rose 1.1 per cent after three months of decline. This still leaves us with 37.6 per cent fewer job ads than we had last year. Unemployment edged up to 6.9 per cent, which are the same levels we saw early in 2000.

The Reserve Bank can be congratulated in turning consumer sentiment around with interest rate cuts seeming to take effect. The consumer sentiment figures are now at levels that are well above their long-term trend in Australia.

This, of course, augurs well for the consumer spending and housing activity. Already, the “wow” factor has kicked in the housing sector, with loan approvals for housing up 15.8 per cent on a year ago.

The individual sectors of the investment markets have performed in varying fashions. Again, Mr Kunnen has reviewed the sectors and provides the following analysis.

p Australian shares

As we are all well aware, the Australian share market had a massive surge on June 30 to push the market to a new record level. During the 12 months, the S&P/ASX 300 Accumulation index rose 9.1 per cent. International and domestic interest rates have remained low. This, coupled with increased government spending, has continued to provide a positive outlook for earnings.

While Australia was providing a reasonable return, most of the offshore sentiment was negative, with most markets falling in June. During the month we also saw a fair degree of corporate activity, with Wesfarmers bidding for Howard Smith, AMP selling its general insurance business to Suncorp/Metway, Barrick Gold of Canada purchasing Homestake Gold and CSL expanding into the US.

There were profit warnings galore from Coles Myer, Pacific Dunlop, WMC and a host of others.

Within the market the rise was somewhat uneven. Banking rose 9.2 per cent over the month, insurance rose 10 per cent, building materials rose 12.7 per cent but telecommunications were down 10 per cent and diversified resources were down 2 per cent. Interestingly, the month of June was better for the larger companies than for the smaller companies.

p Global shares

The Morgan Stanley Capital Index (MSCI) fell 3.2 per cent in US dollar terms and was down a similar amount in Australian dollar terms. The world’s major sharemarkets had a difficult year and June capped this off by falling further.

In the US, the S&P index fell 2.5 per cent for the month, while Japan was down 2.2 per cent and UK fell 2.7 per cent. The US Federal Reserve cut rates for the sixth time this year in a desperate attempt to ensure that that market did not fall into recession. The US cash rate is now at its lowest level since early 1994.

Despite the rate cuts the US markets fared poorly in June. The Dow was down 3.8 per cent. The Russell 2000 index, a measure of America’s smallest listed companies rose 3.3 per cent and NASDAQ was up 2.5 per cent.

Europe was consistent if not confident. As they had in May, all European markets fell. The UK market fell 2.7 per cent, Germany was down 1.1 per cent, and France fell 4.2 per cent. All European markets fell by more than 10 per cent in 2000-2001.

Asia provided a mixed bag. Singapore rose 4.2 per cent, Thailand was up 4.0 per cent and Malaysia gained 3.5 per cent. Japan was disappointing, as were Hong Kong and South Korea, posting losses of 2.2 per cent, 1.0 per cent and 2.8 per cent respectively. It appears that a number of Asian markets are concerned as to the likely performance of Japan’s economy.

p Fixed interest markets

The Reserve Bank in Australia did not change rates in June. The tentative signs of recovery in our economy have led it to feel there wasn’t a need to kick-start the economy via monetary policy at this stage. At present, 90-day bank bills are yielding 5.01 per cent. This compares with a rate in June 2000 of 6.23 per cent. Ten-year bond yields were also relatively stable for the month. Having started June at 6.05 per cent, they ended June at 6.06 per cent.

p Listed property

This sector was highly sought after in view of its defensive characteristic. The index rose 4.5 per cent in the month.

For the year the rise was 13.9 per cent. Of all the major domestic asset classes, listed property provided the best returns for 2000-2001.

At the end of June, the sector was providing a yield of 8.0 per cent and was trading at an 11 per cent premium to net tangible assets. This is a level regarded as fair value. If the economic recovery signs are sustained, it is likely that we could see investors shying away from the defensive assets, such as listed property.

Concurrently, an improving economy could result in greater demand for office and retail space, which will benefit the sector.

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