Shares: Plenty of pain, but not much gain

What are we going to do with the Aussie sharemarket? As 2014 nears it close the market looks like finishing just about where it started the year. Well, slightly better than that, it’s currently just over 1 per cent thanks to the Santa rally, which according to CommSec makes it the 44^th best performing market in the world. Big deal.

In comparison Wall Street finished the year nearly 9 per cent ahead at record levels bringing it in at 25^th. Argentina, China and Venezuela have been the global outperformers in 2014 with India, Egypt, Ukraine, Turkey, Pakistan, Sri Lanka and Denmark all in the mix. The past year would have been a field day for contrarian investors!

In contrast, Russia, Portugal and Greece have been the global sharemarket under-performers.

But in a year where yield was hard to come by, except in property, the local stockmarket was a disappointment though it wasn’t all bad news. Despite approaching storms clouds in the form of the Murray report, the banks once again proved resilient with CBA hitting a new high as the year ended.

Telstra also was reborn with a sharper management focus, an enticing dividend policy and a bank account that will be inflated by an $11 billion network buyout courtesy of the National Broadband Network.

But nothing could negate the gloom hanging over the market as the resources investment boom passed into history ending amid a collapse in commodity prices. Iron ore, coal and energy all took a pounding as China and to a lesser extent Europe failed to fire on the economic front.

The sharemarket basically exists on big financials, resources/energy and to a lesser extent property. One look at BHP-Billiton and Rio Tinto’s share prices heading toward decade-lows told the story.

Even all those new floats that looked so enticing during the year were looking decidedly sick with most at or below their issue price at year-end. After a shaky start Medibank Private was proving an exception.

In fact it was government bonds, particularly those index bonds that were still firing with returns including capital heading toward double figures. The market was factoring in the RBA lifting rates and got it wrong.

Globally everyone was predicting a global bond sell-off as interest rates started to climb back to normal levels, but fear that the commodity rout, particularly in oil, was based on a weakening global economy  triggered another bond rally at sometimes negative yields.

The same couldn’t be said for the corporate sector with many company bonds suffering from indigestion and worries about the economy going forward.

Of course not every economy was stumbling. The United States recovery just went from strength to strength, underpinned by a cheaper greenback, low interest rates, a ton of liquidity and a self-sufficient energy supply. Little wonder that at year-end the US economy was motoring along at above 5 per cent GDP.

Unfortunately this will bring the day of reckoning – when the Federal Reserve Board is forced to lift rates – closer if the US is to keep inflation under control. So far the Fed is still making soothing noises to the market to make sure that when they do lift rates it will be a ‘so what’ moment.

So now the big question is what’s going to happen in 2015 and a lot will depend on the commodity cycle and China’s handling of its economy.

The consensus is that property will continue to outperform but nowhere near the 8.5 per cent nationally (before rent) that it registered in 2014.

CommSec continues to the be optimistic: “The Aussie sharemarket is expected to recover in 2015. Valuations are favourable with the price-earnings ratio at two-year lows. Company balance sheets are in good shape and the combination of low oil prices, low interest rates and a weaker Aussie dollar will provide momentum to the economy.

“CommSec expects the All Ords/ASX 200 to reach 6100 points by the end of 2015.”

Now that’s what I want to hear. Just don’t mention higher global interest rates, a banking crisis in China, war in middle Europe, oil producing countries defaulting, terrorist attacks . . ?

Time for a Christmas drink.

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