THE WEEK AHEAD: How we’re falling behind the global sharemarket pack

Aussie investors would no doubt be disappointed with the performance of the sharemarket this year. Still, most would conclude that most investors across the globe are also suffering given the woes in Europe. But actually that is not the case. Of the 72 global sharemarkets tracked by CommSec, 32 of the markets were higher at the end of May compared with the beginning of the year.

Leading the pack is Estonia, up almost 35%, followed by Kenya, up 30%, and the Ukraine, up 29%. Interestingly the top of the leader-board is very much dominated by countries in Eastern Europe and North Africa. The only real exceptions are Sri Lanka (6th strongest, up 25%) and Demark (10th strongest, up 15%). While there is a spattering of Latin American and Asian countries also in the winner’s circle, Western Europe and North America aren’t represented.

Understandably the worst sharemarket performance so far this year has been recorded in Greece, down 29%, followed by Cyprus, Slovakia, Spain, China and Portugal. While most investors wouldn’t be surprised to see highly-indebted European countries at the bottom of the list, the presence of China may surprise. The sharemarkets of the so-called BRIC nations – Brazil, Russia, India and China – are all lower compared with the start of the year.

The Australian sharemarket was in 61st spot for the first five months of the year, with the All Ordinaries down 8.8%. Domestic investors would question Australia’s low ranking given the fact that our economy is growing, profits are rising, the country doesn’t have budget deficit or debt issues and the banking system remains sound.

The question is how much judgement is being exercised by global fund managers. Just over 40% of Australian listed shares are owned abroad and Australia accounts for only around 2% of global sharemarket capitalisation. So the decisions of major institutional investors matter.

But when you look closely at the sharemarket leader-boards over recent years, it does stand out that the winners in one year turn out to be the losers the following year and vice-versa. Africa topped the leader-board in 2008, slumped in 2009 and is back on top in 2010. Similarly China’s sharemarket slumped 65% in 2008, lifted 80% in 2009 and is down 20% so far this year.

Global investors no doubt follow themes as there aren’t enough resources to track fundamentals in all countries. But unless you believe in perfect markets, it raises the question whether Australia is being accurately assessed.

The week ahead

The seeming euphoria about the outlook about the Australian economy has given way to more cautious views, so data in the coming week will be important in determining which way we go from here.

On Monday ANZ releases its latest survey of job advertisements while the Performance of Construction index is released the same day. On Wednesday there is a logjam of events. The index of consumer sentiment is released together with housing finance figures and the NAB business survey while the Reserve Bank Governor delivers a speech the same day. And on Thursday the monthly employment report is released while the Reserve Bank issues its latest quarterly Bulletin.

Overall the data is likely to produce mixed readings, confirming that the economy is in consolidation mode after a spurt of growth late last year and early this year. Certainly the latest data on job ads will bear watching as it tends to be a leading indicator for employment. Advertisements rose 1.9% in March before slipping 1.3% in April, suggesting a cautious approach by employers.

The NAB business survey will allow a closer examination of business confidence and conditions when it is released on Wednesday. But the main complaint from businesses at present is that consumers aren’t spending.

The weekly Roy Morgan consumer confidence rating hit a 10-month low in late May, suggesting a similarly soft result for the Westpac/Melbourne Institute measure when it is released on Wednesday. Still with interest rates seemingly on hold for a while now, consumers are likely to become more chipper.

The housing finance data should prove interesting. The indications are that the number of loans from owner-occupiers fell for the seventh straight month, down 1%, influenced by the constant procession of rate hikes. But the actual value of loans may have lifted 3% with this figure picking up increased investor activity.

The May employment data is likely to be the strongest of the week’s economic indicators. We expect that employment rose by around 20,000, keeping the jobless rate reasonably stable near 5.4-5.5%.

Turning our attention overseas, there is a spattering of economic indicators to be released in the US over the week, but for Australian investors the monthly batch of Chinese indicators are likely to be of more interest. On Thursday, China releases figures on exports, imports and property prices while on Friday a rash of indicators will be released including retail sales, industrial production and consumer prices.

In the US, there is only a spattering of “top shelf” economic indicators in the week ahead with the key data late in the week. The Federal Reserve releases its Beige Book report on the economy on Wednesday with international trade on Thursday and retail sales and consumer sentiment slated for release on Friday.

Analysts are only tipping that sales advanced by a modest 0.2% lift in May, in line with the soft personal spending result. Still, retail sales will only gain momentum when the unemployment rate is substantially below the current 9.9% level.

And on the same reasoning only a modest lift in consumer sentiment is likely to have occurred in June with analysts expecting a lift from 73.6 to 74.0.

Sharemarket

There certainly has been a marked increase in volatility on the sharemarket in recent weeks. In March the All Ordinaries either rose or fell more than 1% on just two trading days in the month. And in April the number of volatile days lifted to just three days. But in May there were 15 days where the All Ords rose or fell more than 1%.

At the heart of the issue have been concerns about budget deficits and debt maintained by European countries. But when you add in issues like the volcanic ash cloud in Europe, oil spill in the US and worries about the health of the Chinese economy it is understandable that investors have become jittery.

Certainly when volatility increases, buyers retire to the sidelines, as evidenced by the 10% fall in the All Ordinaries since late April.

Interest rates, currencies & commodities

The greenback has sprung back to favour over the past month or so. In fact over the first five months of the year only 24 out of 120 currencies have appreciated against the US dollar, and those currencies that have risen, have made only modest gains.

The strongest currency is the Malaysian ringgit, up almost 5%, followed by the Guatemalan quetzal, up 4%. Interestingly Asian currencies are well represented at the top of the leader board including those from Indonesia, Thailand, Japan India and Singapore.

At the other end of the scale, currencies from western and Eastern Europe have recorded the biggest declines. At the end of May, the Hungarian forint had weakened by 19% against the US dollar with the Euro down 16.5%.

The Aussie dollar ranked 93rd of the 120 currencies, dropping 6% over the first five months of the year.

Craig James is chief economist at CommSec.

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