The Australian share market was flat in March, with the All Ordinaries Index declining by 0.2% to close at 5,403 points. In the US the Dow Jones Index gained 0.8%, in London the FTSE fell 3.1%, in Hong Kong the Hang Seng Index fell 3.0% and in Japan the Nikkei 225 Index fell 0.1% for the month.
The flat performance came on the back of softening of the Chinese economic data, weak US economic data (primarily due to poor weather) and comments from Janet Yellan (in her first meeting as head of the US Federal Reserve) suggesting a rise in US interest rates earlier than expected.
While an increase to interest rates in the US is not something totally unexpected in the future, Ms Yellan's comments that interest rates could rise six months after the US Federal Reserve stops its asset purchase program in late 2014 came as a surprise.
The implications for investors of rising interest rates in the US would be a general strengthening of the US currency (most likely as funds flow away from emerging markets), further pressure on the Chinese economy (as its currency is 'pegged' to the US dollar) and the potential for a capital loss for US government bond investors.
The chart below shows the implication for US bond investors on a potential rise in interest rates.
Source: Magellan
As noted above, government bonds are traditionally considered 'defensive assets' in your portfolio, and if bond yields increase to 5%, bond investors will face a capital loss of up to 18%. With the potential for a capital loss (via increasing interest rates), investors may need to look elsewhere for 'defensive assets' in their portfolio.
Even though term-deposit interest rates are at historical lows, term deposits remain a secure form of defensive assets. Furthermore, high-grade short duration (i.e. term) corporate credit may also provide a more compelling 'risk-reward' payoff for defensive assets in the immediate term (given the expectations of future rate increases).
This month also saw Australian equities reporting season deliver results just slightly ahead of expectations, with the trajectory of growth for the Australian economy the big issue, particularly for industrial (non-resource) shares.
The December quarter GDP figure, a stronger than expected 0.8%, shows some positive tentative signs that the Australian economy is transitioning well from the mining investment boom. Overall, earnings per share growth is expected to come in at around 13% for the year ending June 2014.
The Reserve Bank of Australia kept the Target Cash Rate on hold in March at 2.50% per annum. The RBA Board meet again today, with the expectation for remains to remain unchanged. The Australian Dollar strengthened by 4.25% in March, with 1 Australian Dollar currently buying 92.76 US cents.
For more information please contact Ryan Love on 1300 856 338 or e-mail ryan.love@apexpartners.com.au.
This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.