Can an economy give you mixed messages?

The second quarter (Q2) of the 2012/13 financial year saw strong investment returns for risk assets such as shares. The ASX 200 provided a return of 16.39% for the period July to December, and LUCRF’s Balanced fund return was 6.99% for the same period.

Many members may be puzzled by the apparent inconsistency between short-term performance of the share market and the economic news that they may read or hear. (See inside for related content).

This quarter (Oct - Dec 2012) has seen expected profits of companies revised down for the seventh month running, and 76% of US companies have reported losses in their Q3 (calendar year) results.

Households are spending less and businesses around the globe are no longer borrowing to reinvest into their business, which has resulted in capital expenditure reaching its weakest point since the end of WWII.

Meanwhile, Japan is already in recession and the ongoing economic and political troubles in Europe remain extreme with the EU expected to fall back into recession in 2013.

updateMarket

Second Quarter (Oct–Dec) 2012-13

In this edition

• Can an economy give you mixed messages?

• What drives strong share markets?

• LUCRF Super continues to develop alternative investment choices

• What is a bull or bear market?

• Market price fluctuatoins

• Retirement seminars

In spite of continuing negative economic news, global share (equity) markets have continued to perform strongly. The prices of shares are now at levels considered historically expensive, particularly in the US.

There are four underlying reasons for this.

1. Government strategies and policies

Governments and central banks around the world have been putting strategies in place to encourage consumers to take up credit and boost their spending in order to create increased company profits. If successful this will lead to increased employment and boost economic growth.

2. No new geo-political catalysts

At this point in the new financial year, the world hasn’t experienced any new catalyst events resulting in markets to sell down, such as:

• Major new geo-political events

• Sovereign defaults

• Economic shocks or

• Political shocks

In other words, the bad news has already been priced into the markets (See story – How market expectations influence market movements).

3. Funds moving away from shares

Many global pension funds have already moved away from shares. An interesting example of this was that during September, pension funds in the United Kingdom (UK) held more bonds than shares for the first time since 1957, so little further selling has occurred.

On top of all this, developed world share markets are shrinking unusually, so there are fewer shares in the market in which to invest. This means that share prices are kept high as investors compete with each other to buy the shares, (i.e. reduced supply). This can be seen as a direct result of company share buybacks, takeovers, bankruptcies and a reluctance to test market confidence with new offerings (IPOs).

4. Equities vs Bonds

Of the two traditional institutional asset classes (equities and bonds), equities appear to be far more attractively priced at present.

One of the effects of the response by Governments and central banks around the world has been historically low interest rates such that the returns on government bonds over the next ten years are below that of inflation.

So although shares appear to be expensive, they are also appearing to provide better short term returns than bonds and this has helped keep the prices on shares higher.

2 LUCRF Market update Q1 2012-13

What is a bull or bear market?We hear lots of talk about bull or bear markets in the media, but not everyone fully appreciates the differences between these financial descriptions.

To assist members to appreciate the underlying themes of financial commentary, we have outlined the general market characteristics of both types of markets.

LUCRF Super continues to develop alternative investment choicesVolatile market conditions continue and LUCRF Super’s investment team is working hard to develop resilient investment options for our members. One example is our new Targeted Return investment option which will be available from November 2012.

This new member investment option will aim to reduce volatility in uncertain market conditions, while also seeking to preserve more capital than other more risky portfolios should prevailing conditions be worse than those anticipated in market prices. The new investment option will seek to smooth out the rises and falls in the market that are often characteristic of uncertain economic conditions.

This option is designed to provide better outcomes for our members during volatile market conditions.

Market type General market characteristics

• Expected increase in future profits

• Optimism of future economic conditions

• Efficient use of productive resources

• More buyers than sellers

• Expectation of lower profits into the future

• Pessimism of future economic conditions

• Inefficient use of productive resources

• More sellers than buyersBear

Bull

Charging

Raging

Hibernating

Sleepy

Bull

Bear

Market type General market characteristicsSynonyms

Expected increase in future pro�tsOptimism of future economic conditionsEf�cient use of productive resources More buyers than sellers

Expectation of lower pro�ts into the futurePessimism of future economic conditionsInef�cient use of productive resourcesMore sellers than buyers

Charging

Raging

Hibernating

Sleepy

Bull

Bear

Market type General market characteristicsSynonyms

Expected increase in future pro�tsOptimism of future economic conditionsEf�cient use of productive resources More buyers than sellers

Expectation of lower pro�ts into the futurePessimism of future economic conditionsInef�cient use of productive resourcesMore sellers than buyers

What drives strong share markets?

How market expectations influence market movements

LUCRF Market update Q1 2012-13 3

Continuing concern in the EurozoneMonth ASX200 performance

July 4.28%

August 2.14%

September* 2.18%

October 2.98%

November 0.47%

December* 3.35%

*Current to December 31 2012

On the back of concern about global risk, ECB President Mario Draghi commented that the ECB was prepared to do

“Whatever it takes to preserve the Euro.”

This comment provided investors with a degree of comfort and resulted in a more positive view of share markets. For example the ASX 200 rose for three consecutive months during the quarter.

It is important to look at current prices and conditions, but also what those prices are telling us about market expectations for future conditions.Essentially the market is forward looking, which means that market participants are constantly reflecting a view of future conditions and this is shown in current prices.

Positive and negative moves are always dependent on the prevailing conditions against these priced expectations. People are often surprised by the fact a stock’s price may decline in spite of a large headline profit announcement. The reasoning behind this example is bared market expectations of future conditions.

If the market anticipates a particular result for a company but company announcements don’t meet those expectations, then the market will simply reflect this new information in the revised price of each company, even if this revised position does seem to go against the grain of the overall announcement.

This is how positive (or negative) results can have a negative (or positive) impact on the share price. We often see this scenario play out in the real world.

In 2010 and 2011 equity market performance was disappointing, largely because market participants were still anticipating a return to normal economic conditions. As information was released and it became clearer that this would likely be a prolonged period of difficult conditions, this was slowly reflected in market prices.

So, even though we now see a number of negative headlines reporting dismal economic conditions around the world, the market has largely already priced this information in and is waiting for a catalyst to alter this view.

When the ECB president and head of the Federal Reserve announce they will go to extreme lengths to ensure stability in the financial system (as they did during the quarter), a market which has partially priced in the risk of system failure can relax somewhat and reflect this information in pricing.

How much each piece of new information is worth is always very difficult to say. Currently it is fair to say the market, in spite of the recent rally, remains relatively pessimistic about future conditions.

Pricing seems to reflect a view that developed world economies will experience many years of weak growth, low inflation, high unemployment and moderate profits.

The good thing about this for investors is that any moderately good news will likely have a bigger positive effect on prices than moderately bad news. Clearly, very bad news will still have a severe impact on market pricing and systemic risks remain at elevated levels.

Anticipated result

Actualresult

$3Bprofit

$2.5Bprofit

Stock price

Anticipated result

Actualresult

$3Bloss

$2.5Bloss

Stock price

Company A

Company B

Making the transition to retirement can be one of the more daunting changes in anyone’s life.There are so many things to consider that it almost seems like you don’t know where to start. LUCRF Super understands how you may feel preparing for retirement and this is why we provide FREE retirement strategy seminars for all of our members.

Our retirement seminars are delivered in a friendly environment, where questions are welcomed and interaction is encouraged. We are here to help you make the right decisions so please don’t be shy! Family and friends are also welcome to attend so please feel free to bring them along too. Seminars run for approximately 1.5hrs.

Our specialist presenters cover topics like:

• Superannuation concepts

• Market update

• Transition to retirement explained

• Government changes and how they affect you

• Maximising the Age Pension at retirement

• General question & answer time.

To find out when we are going to be in your area, please consult our seminar schedule at www.lucrf.com.au

Contact LUCRF Super

1300 130 780Web: www.lucrf.com.auE-mail: mypartner@lucrf.com.auPost: PO Box 211 North Melbourne VIC 3051Fax: (03) 9326 6907

An award-winning fund

Issued 30 November 2012 by L.U.C.R.F Pty Ltd ABN 18 005 502 090 AFSL 258481 as Trustee of the Labour Union Co-operative Retirement Fund ABN 26 382 680 883 (LUCRF Super). This is general information only and does not take into account your personal financial situation or needs. Please read our current Product Disclosure Statement (PDS) to decide if this product is right for you. To obtain a PDS or to speak to our friendly LUCRF representatives about personalised financial advice please call us or visit our website www.lucrf.com.au

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