Divergence in economies and markets was a major theme for investors in 2014, alongside geopolitical tensions and sliding commodity prices.
With US activity picking up, the US Federal Reserve ended its quantitative easing program and signalled potential interest rate rises in 2015. An increase in US interest rates would be the first move since 2008, although it said it would exercise patience.
Meanwhile, Europe and Japan looked to be heading back down the deflationary tunnel. With deflation shadowing Europe, the European Central Bank contemplated its own quantitative easing program, boosting the US dollar. Similarly, in Japan, the economy slipped into recession and Prime Minister Shinzo Abe unveiled another $30 billion stimulus package.
In China, industrial activity eased and the property market slowed. By November the People’s Bank of China responded by cutting interest rates for the first time in two years. The impact of slowing Chinese steel production and rising supply hit the iron ore price hard. By the end of 2014 the iron ore spot price had lost nearly 50% in US dollar terms.
Oil was a major story. The price ended the year down 45%, with the majority of those losses in the last quarter. Supply was the driver, with US unconventional wells being the world’s new production source in recent years. In response, OPEC vowed to not cut production to accommodate higher cost US oil at its November meeting.
At home, the falling iron ore and coal prices hit Australia hard, dampening incomes and punching a hole in the federal budget. With inflation subdued and the unemployment reaching 12 year highs the Reserve Bank continued to leave interest rates at record lows. With the US dollar rising and commodity prices falling, the Australian dollar fell heavily.
Asset Class Returns
The following outlines the returns across the various asset classes to the 31st December 2014.
Equity markets diverged significantly over the year, reflecting in part the fortunes of the underlying economies. The US, China and India were some of the strongest market performers, while oil dependent Russia was at the rear.
In the December quarter the US S&P 500 hit record highs, registering its eighth consecutive quarter of growth to end the year 24% higher. In Europe the picture was less bright. Major indexes finished the year off in sluggish fashion, just as they began it.
After a double digit negative first quarter, Japan’s Nikkei strengthened thanks to a weakening Yen and further stimulus expectations. Meanwhile in China, the Shanghai Composite went into overdrive finishing the year with a 45% surge in the final quarter.
With the commodity boom continuing to recede, resource exposure was a drag on the Australian market. Consequently, total gains (price and dividend) were modest at just over 5% with a strong final quarter helping to erase the third quarter correction. The top performers came from the healthcare and telecom sectors. Somewhat making up for equities was the impressive double digit returns from Australian listed real estate, again highlighting the benefit of diversifying across asset classes.
The Australian’s Dopey Picks
Last year at this time we brought you the story of how The Australian newspaper’s top stock picks for 2013 had fared. To refresh your memory, it was extremely poor:
Of The Australian’s 66 “top share picks” for 2013 there were 31 winners and 35 losers. The average gain on the winners was 30% and the average loss on the losers was -43%. The average return from all picks combined was -8.86%. A staggeringly bad result when the ASX 300 was up 14.65% which meant this collected wisdom from The Australian’s “industry experts” underperformed the market by over 20%.
The Australian had another list for 2014, but before we get to it, The Australian’s own poor share picking didn’t deter it from wading into a late year discussion on Australian National University (ANU) announcing its intention to divest some energy and resource companies from its investment fund. In an editorial, The Australian criticised ANU for “poor judgement” and “dopey stock picking”.
With that sort of bravado we assumed The Australian was on track for a stellar year with its picks in 2014. Then we tallied them up…
Out of the 65 share picks The Australian offered up for 2014, there were 22 winners, 42 losers and one company that closed the year at the same price it opened. From the 22 winners there was an average return of 41.12% and from the losers there was an average loss of 34.26%.
The average return from all 65 picks was a loss of 8.21%, while the ASX 300 (price only) lurched to a 0.83% gain. So again, The Australian’s picks again underperformed the market significantly; only in 2014 it was slightly less embarrassing because the market didn’t set the world on fire.
However The Australian’s consistency in posting negative returns should serve as another warning to those taking their cues from media investment tips. No matter the market conditions, The Australian’s returns were awful. In 2013 when the ASX 300 posted double digit returns The Australian’s tips finished in the red and in 2014 when the ASX 300 struggled to a positive return, The Australian’s tips again finished in the red. It seems they’re all conditions failures!
This is also a reminder that true diversification isn’t achieved by holding a large amount of shares in one country. It’s achieved by holding a number of funds, spread across asset classes, throughout the world. Once you’ve set up a portfolio like that, there’s no need to look for new share tips each year.
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.