Economic Overview

The global economic backdrop remained mixed in the June quarter. Continued recovery in the US and modest gains in Europe and Japan were offset by a continuing slowdown in China, weak commodity prices and Greece’s recurring debt woes.

Globally, monetary policy remains highly accommodative. However, the US Federal reserve has declared its intention to raise interest rates sometime this year if key indicators continue to strengthen.

Across the Atlantic, despite an easing of deflation fears and small signs of an economic recovery, the European Central Bank kept rates at record lows and continued its quantitative easing program.

In Asia, the economic news was also mixed. In Japan, business sentiment improved as the economy emerged from a recession trigged by last year’s hike in sales taxes. Meanwhile China grappled with slowing exports, manufacturing and its property market. In late June, China’s Central bank cut interest rates for the fourth time since November.

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For Australia, the falling terms of trade and low growth in labour costs depressed incomes. The fall in mining investment, as major projects have come online, has yet to be replaced by new growth. Central banks in Australia and New Zealand were both torn between heated housing sectors and falling commodity prices, yet opted to cut interest rates to offset weakening overall demand.

Late in the quarter, Greece’s five-year-long debt crisis came to a head after the breakdown of marathon talks with its international creditors. The prospect of a Greek default unnerved markets and raised concerns of a break-up of the 19-nation Euro currency block.

Market Overview

Asset Class Returns

The following outlines the returns across the various asset classes to the 30th  June 2015.

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A strong start to 2015 for equity markets gave way to a more mixed picture late in the second quarter as attention moved to the prospect of higher US interest rates and the future of Greece in the Eurozone.

Despite the late June dip that dragged quarterly returns down, over the full financial year most asset classes delivered solid returns.

Currencies boosted unhedged global equity returns through the year as the $USD rose in anticipation of a US rate hike, though this effect waned in the June quarter.

Global indices ended largely flat for the quarter as the Greek debt crisis eroded gains towards the end of June. The UK was the top developed market in Australian dollar terms, while the US market was mostly unchanged.

Emerging markets were flat over the quarter, with small companies beating large and value companies beating growth. China was the standout market across the financial year, even with a heavy fall in June, the Shanghai Composite Index was still up over 150% for the year.

The Australian market lagged those offshore, dropping 6.5% for the quarter to reduce its full year return to 5.6%. Again, most of that damage was done in the last weeks of June as the market reacted to Greek debt, China’s share market tumbling and the RBA talking down interest rate relief.

That was a bad few weeks… or was it?

Q:  I am concerned at all the turbulence in the markets and wonder if I should move my share-based investments inside super to cash until things calm down.

That question was put to financial advice columnist Noel Whittaker on July 14. Noel offered an uninspiring one sentence response; so we thought we’d go into a little more detail and analyse the timeframe that inspired this question.

Due to Greek debt and Chinese gamblers, world markets suffered significant volatility across June & July. If you were just reading the headlines or heard general news reports when the media decided the sharemarket’s falls were big enough to warrant reporting on, you’d likely think it was a horrible span of a few weeks and investors were left significantly in the red.

You’d be wrong.

While the market falls came at exactly the wrong time for anyone using the end of the financial year as a measuring stick, 14 days into the new financial year and the market was actually higher than it was a month earlier – a time of relative calm when no one was yet talking about Greece!

While Greek’s debt saga could drag on further and China’s stock market gamblers could sell up when restrictions are lifted or get a second wind, this past month serves as an important lesson in how to handle volatility.

We’ve compiled a chart of the ASX All Ords from June 15 to July 15, we’ve then superimposed some headlines taken from the Australian Financial Review that highlight how quickly the media whips between light and dark stories, some amusingly timed. The chart also highlights the volatility a sharemarket can endure during a one month period (with some significantly down days); yet still end that month higher than it started.

If you expand the chart, you’ll note the warnings on Greece started 15 days before the deadline and become more apocalyptic as the 30th of June grew closer, aligning with the market declines. At the absolute bottom we were told “Greek saga set for a catastrophic turn” only to see the market race higher. At the next peak the headlines said “The Panic Has Gone – For Now” only to see the market take a large drop.

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Many of the headlines appear to have awkward timing to them – seemingly relentless market declines are followed by headlines of more horror to come and at that moment the market sharply turns upwards. Or just when the headlines say “don’t panic” the market moves sharply downward.

If you truly want to get something out of this chart, we’d ask you to imagine yourself looking at the ASX close on June 15 at just under 5,500 points. Then imagine you went on holiday for a month to Tropical Island with no communications, meaning you had no idea what the market was doing. Then imagine you arrive home on July 15 to find the ASX close at just over 5,600 points.

Would anything that happened between those two dates have really mattered to you? And if you wanted to exit, when would be the right point to wait for calm to re-enter? As investors we need to remember short term sharemarket charts often appear as disconcerting as the period between June 15 and July 15, meaning there’s no chance of correctly picking “when things will calm down”.

With thanks to DFA Australia.

This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.

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