Up until May, the Australian share market (as measured by the S&P/ASX 200 index) performed strongly returning 8.4% over the four months. What was particularly promising was the consistent positive monthly returns that were being generated as opposed to the high volatility of 2011.
However, the positive momentum came to an abrupt end during May. The index fell 7.3% and investment markets are again being driven by negative sentiment, mainly around a significant weakening of Europe’s ability to navigate the ongoing economic crisis in the region.
Greek elections on 6 May failed to produce a government, casting a shadow over Greece’s willingness to honour its commitments to previously agreed-to bail out packages. Later in the month, the Spanish government bailed out Bankia, one of its three largest banks. While the bailout may have addressed short-term issues for that bank, it immediately raised questions of other banks in the country and of the sovereign itself.
In early June, the US reported poor jobs data which has also dampened investor enthusiasm about a US economic recovery.
In Australia, the Reserve Bank of Australia cut interest rates in successive months (May and June) by a total of 75 basis points in response to weaker than expected economic conditions. With the funding pressure on Australian banks ongoing, competition for deposit funds continues to remain intense, and banks have passed on part, but not all, of the rate relief to consumers and small businesses.
It is our view that a continued easing of monetary policy will be needed to stimulate the non-mining related sectors of the Australian economy, especially housing and construction, manufacturing, education and tourism industries – these continue to struggle.
Interestingly, while the domestic economy can be best described as a ‘two-speed economy’ – characterised by a booming mining industry in Western Australia and Queensland – the share prices of resource stocks have fared much worse than the broader market: down more than 10% for the year to date.
Australian Ethical Investment’s funds do not hold resources stocks, as such our portfolios have weathered much of the recent storm, and indeed all our funds are in positive territory calendar year-to-date.
While there really isn’t anywhere for us to hide in our equity funds in uncertain times, we are minimally exposed to companies that have a direct exposure to the troubled European economies. Our healthcare investments will continue to see demand for their products irrespective of what happens in Greece, our biotechs continue to develop exciting new treatments for diseases and our telco & IT companies will continue to offer their services to Australian consumers.
We continue to place a greater emphasis on quality companies with robust business models, and manageable debt positions. Our biotech names are mostly in the latter stages of clinical development with commercialisation typically expected in the next 1 to 2 years, and we are selectively pursuing new opportunities where we see compelling value.
Chief Investment Officer
Australian Ethical Investment