• the implications on world sharemarkets by the debt freeze in Dubai
• the mixed bag of economic numbers in Australia, and
• what it all means for investors.

View the December Economic and Market Update video here.

Download Brian Parker video script.

With 2009 coming to a close, Market Watch examines the key economic indicators, what changed over the year and what could happen in 2010.

Australian sharemarkets
After a terrible start to 2009, the subsequent rally of the Australian sharemarket has lifted investors’ spirits and gone some way to repairing their loss of faith.

Back in January, the mood was extremely different. The Australian sharemarket suffered crippling blows following the lead of the US where the effects of the GFC were in full swing.

On the back of fears the economic downturn had deepened, $40 billion was wiped from the value of the Australian sharemarket in one day and the S&P/ASX 200 plunged 4.27%.

Investors ran for cover with many choosing safe havens like cash and bonds as capital preservation became the main priority.

And while history shows that the sharemarket always bounces back, fear had taken hold. No one knew when we’d hit the bottom or what shape the recovery would take.

Now eight months on now from the March low, the speed and strength of the recovery has surprised even the most bullish investor. The sharemarket rally saw gains each month for seven months in a row, vindicating those who maintained their Australian sharemarket exposures.

Surprisingly, Australian banks were the standout performers for 2009. The Reserve Bank of Australia (RBA) recently reported that the four majors – NAB, ANZ, Westpac and CBA had recorded total headline net profits of around $8.6 billion in the latest half year with the annualised net profit on equity at around 13.5%.

It was only at the end of October that the sharemarket fell for the first time in eight months. For the September quarter alone Australian shares returned 22% – the strongest quarterly result since 1987.

Interest Rates
The cash rate in Australia has also enjoyed its fair share of record breaking moments in 2009.

In an attempt to prevent a seemingly inevitable recession in Australia, the RBA lowered the official interest rate in February to 3.25% and then to 3% in April.

These drastic measures were aimed at relieving pressure on household incomes and also proved the RBA feared the worse, with a view that the economic scenario could get considerably darker.

Eight months later and the cash rate stands at 3.75% following raises in October, November and December. This is the first time the RBA has lifted the cash rate three months in a row since it began announcing its decisions on monetary policy in January 1990.

More significantly, Australia was the first developed country to raise interest rates.

While not exactly good news for mortgage payers, this latest rise at least confirms the belief the economy has improved substantially and the ‘economic emergency’ that would justify an interest rate of 3% hasn’t materialised.

Australian dollar
The other remarkable story of 2009 has been rise of the Australian dollar- up more than 40% from January’s US66cents mark.

Its rise against the US dollar is thought to be due to a combination of investor sentiment, risk appetite and ‘carry trades’ – borrowing in low interest rate currencies and investing in higher yielding currencies.

Having said this, the continued weakening of the US dollar has seen it fall against oil, gold, copper and the Euro, not just the Australian dollar.

Our dollar is now near 15 month highs, around US92 cents- another indicator that our economy is performing better than our northern hemisphere big brother.

While there’s been talk of the Australian dollar reaching parity with the US dollar, the general consensus suggests it will remain in the low 90s in the foreseeable future.

Where to from here?
What will happen in 2010 is anyone’s guess. Will the RBA lift the cash rate again? Will the sharemarket continue its recovery or will there be a pullback? Can the Australian dollar reach parity with the US dollar?

While these questions remain unanswered until next year, 2009 will be remembered as the year the Australian economy excelled it’s global counterparts.

And whether or not you choose to agree with their policies, the Government and RBA, should be acknowledged for doing their part in providing a solid foundation leading into 2010.

“The apparent resilience of the Australian economy reflects a number of factors,” says MLC Investment Strategist Brian Parker.

“The policy response from both the Government and the Reserve Bank was swift and substantial. The RBA reduced interest rates faster than ever before, and to levels not seen in decades. The Government’s fiscal measures, particularly those directed towards households, did contribute to economic growth during the first half of 2009. Our banking system, through a combination of good management, sound regulation, and good luck, has not experienced the difficulties seen elsewhere”.