2010/11 Investment market update
3 October 2011
In the 2010/11 financial year investment markets followed a very similar path to the previous 12 months. The strong returns achieved by asset classes again masked the fact that 2010/11 was a volatile period for investors in which sentiment often swung widely.
As was the case in 2009/10, the last financial year could be divided into two distinct periods for investment markets, when investors were either clearly risk averse or, on the other hand, were happy to assume more risk.
Equity markets rise
Despite the year commencing with concerns regarding sovereign default in Europe (particularly in Greece) and the possibility of a ‘double dip’ recession in the US, the first nine months of the financial year saw share markets steadily rise before retracing some of the gains in the last quarter, particularly in the Australian market. The catalyst for the initial rally in global share markets was action taken by policy makers to boost economic growth and to allay fears of a Greek default.
Substantial fiscal packages were announced in the US and Japan, and the US Federal Reserve later provided further monetary policy easing through a $US 600 billion package to buy US Government bonds, a move that became known in financial markets as QE2 (the second round of quantitative easing). However, risk aversion held sway in the final quarter.
As the impact of the Japanese earthquake and tsunami on global trade was felt, credit agencies threatened to downgrade the AAA credit rating of the US, and political indecision in Europe renewed fears of a Greek default.
At one stage, the Australian share market was down more than 10% for the quarter, before recovering in the final few days. Although still posting a negative return for the quarter, the strong performance in the three preceding quarters enabled the Australian share market to register a return of approximately 12% for 2010/11.
Strong Australian dollar affects returns
Overall, global share markets gained more than 20% for the financial year, but the strength in the Australian dollar meant returns to Australian investors fell away to less than 3%. Bond markets returned around 6% for the year, with yields rising and falling in tandem with the risk appetite of investors.
The new financial year has had a very rocky start, with fear gripping financial markets following the S&P downgrading of US sovereign debt from AAA to AA+. Despite share market valuations appearing attractive, with markets trading below long term average price earning ratios, it is difficult to see a return to less volatile times until financial markets see a clear and workable resolution to the debt problems of the US and Europe.