THE WEEK AHEAD: Investor signposts

Given that there is just under a fortnight to go until the end of the financial year, we are in a pretty good position to sum up how things have gone.

While it was shaping up to an even better year at one stage, the Australian sharemarket is still set to chalk up healthy growth for the 2009/10 financial year. At this stage the All Ordinaries is set to post gains of around 16% – the best performance in three years – after falling by 26% in the 2008/09 year.

But as always it is important to stand back and assess the performance from an even longer-term perspective.

While it tends to be forgotten now, in the four years up to the 2006/07 financial year the sharemarket recorded stellar gains averaging just over 20% a year. Then came the US financial crisis, and over the 2008 and 2009 financial years the sharemarket gave back some of the super-normal gains, recording average losses of around 20%. But on average over the past seven years, the sharemarket has lifted by 8% per annum.

In terms of total returns (capital growth and dividends), the All Ordinaries Accumulation index has lifted almost 19% so far this year after retreating 22.1% in the 2008/09 year. Over the past seven years, total returns have averaged 12.3% a year – totally consistent with the longer-term 25-year average performance.

In other words investors who remained in the market over the good times and the bad have been rewarded for their patience.

What about the other asset classes? Well the interesting point is that you would have made money over the past year whether you placed the funds in residential property, bonds or cash. At this stage returns on residential property in 2009/10 are likely to have grown by around 15% with returns on bonds lifting around 5% and cash returning close to 3.7%.

Over the past seven years Australian shares have out-performed other asset classes, growing just over 12% versus just under 10% for residential property, and just under 5.5% for both bonds and cash.

Of course if you rejig the investment period by a year or two you do get slightly different results. For instance over the past nine years average annual returns on residential property were almost 12% versus around 9% for shares.

As always the old adage is not to put all your eggs in one basket. Seven years ago, if you put 35% of funds into both shares and property, 20% in bonds and 10% in cash you would have converted $500,000 into almost $900,000.

The week ahead

It looks like a good time to take a winter break – certainly you wouldn’t be missing much when it comes to the economic data to be released over the coming week. There are no Reserve Bank events of note and only a handful of indicators that are worth watching. Data on imports and new car sales will be released on Monday together with the Commonwealth Bank business sales index. On Tuesday ABARE issues its latest commodity forecasts and then there is a large gap to the financial accounts, released on Friday.

After the out-sized increase in new car sales in April, a softer result is tipped to have occurred in May. Effectively the large stock of vehicles ordered late last year were delivered in the early months of 2010 and car sales should gradually taper down over the next few months. Certainly May was still a healthy month for the car industry with a record amount of vehicles sold for any May month. But in seasonally adjusted terms, new car sales are expected to have eased by around 1%.

While the government tax break is now largely forgotten, car sales will be supported by a strong job market and the best car affordability levels seen since the mid 1970s. The buoyant level of construction work underway should also translate into greater demand for work vehicles as the year progresses.

In terms of the other indicators, the data on imports is worth watching, not just because it is one of the more timely readings but also because it is a good gauge of business and consumer spending in the economy. After tracking sideways up to January, there have been signs of more consistent growth of imports in recent months. Certainly the annual growth trend has been improving and now stands at 16-month highs.

The other economic indicator of note in the coming week is the financial accounts data for the March quarter to be released on Friday. The data includes estimates of household financial wealth as well as estimates of foreign holdings of our listed shares and asset holdings of superannuation funds. Super funds have been maintaining historically high levels of cash, but we would expect that these holdings didn’t change much in the March quarter as global sharemarkets vacillated.

In the US, the economic calendar has a few extra entries than in Australia but it is hardly jam-packed. On Tuesday, figures on existing home sales are released together with the Richmond Fed manufacturing survey.

New home sales are issued on Wednesday together with the latest interest rate decision from the Federal Reserve. Data on durable goods orders is slated for release on Thursday with GDP (economic growth) and consumer sentiment on Friday.

The main complication in assessing the data on home sales is trying to account for the Government’s tax credit.

In practice this isn’t easy to do so we’ll have to wait until later in the year to get clearer readings. Economists expect that existing home sales lifted around 5.5% while new home sales may have gone backwards by a similar margin. But keep an eye on the associated estimates of house prices and inventories of housing stock on the market as these may prove more illuminating.

The Federal Reserve hands down another rate decision in the coming week, but it will be another case of putting the judgement alongside the last one in late April to find out how views have changed. The Fed will note that things are getting better, but still improvement remains slow, meaning no rate change for now.

Sharemarket

As noted above, the Australian sharemarket appears headed for gains of around 16% for the 2009/10 financial year. But how have the industry sectors performed? Of the 21 industry sub-sectors, only one has gone backwards over the past year – that is, Telecommunications, down just over 8%. Another defensive sector, Pharmaceuticals & biotechnology, has also underperformed, up just over 2%, with similar growth by the Energy sector.

At the other end of the scale, Autos & components has lifted by almost 58% over 2009/10, followed by Media, up 40%, and Software & services, up 28%. The Banking sector has grown by 25% with Resources up 13%.

Interest rates, currencies & commodities

The 2009/10 financial year began with the Aussie dollar hovering around US80 cents, so the currency appears set for gains against the greenback of around 7% over the year. But the strongest gains for the Aussie have occurred against European currencies reflecting economic woes in that region. The Aussie dollar has lifted around 22% against the Euro over 2009/10 while similarly strengthening around 20% against Pound sterling. In fact against the UK Pound, the Aussie is headed for its biggest rise in at least 29 years and perhaps the biggest gain on record. A flatter performance has been recorded by the Aussie against the Japanese yen and New Zealand dollar over the financial year.

While short-term interest rates have risen over the past financial year, it looks like longer-term rates will finish largely where they began. The cash rate has risen from 3.00% to 4.50%, but the 10-year bond rate is largely unchanged near 5.40% with 3-year government bond yields up by only around 20 basis points to 4.80%.

Craig James is chief economist at CommSec.