Getting back to work in the New Year it is difficult not to contemplate whether the market will rise again in 2015 or have that inevitable correction year.  After three years of consecutive gains can the market do it again in 2015?

While it has been six years since the last global recession it has not been all smooth sailing for the Australian share market with a 15% fall in 2011.  Despite this setback investors who purchased shares at the bottom of the market in March 2009 would have made 119% had they reinvested all dividends.  Given the extent of this rally it is worth remembering that the ASX200 Index still remains 20% below its high reached in November 2007 so we still have more to go if the market is to reach new highs.  This information is displayed in table below where the ASX200 Index gives the return excluding dividends while the ASX200 Accumulation Index includes dividends (this also highlights the importance of dividends).



ASX200 Index

ASX200 Accumulation Index


(no dividends)

(includes dividends)

Return from March 2009 bottom



Return from November 2007 top































The Australian economy will face continued headwinds from the mining and energy sectors in 2015.  Iron ore and oil prices fell 47% and 48% respectively in 2014 which will have flow on effects for the Australian economy as mining and energy companies cut costs and defer capital projects.  State and Federal Government budgets will also come under pressure as they receive significant sums of money from royalties on the sale of iron ore.  The Western Australian State Government had budgeted for an iron ore price over over $100 per tonne, but with prices now around $70 it faces a $1 billion budget shortfall.  The Federal Government tax revenue could be $2.8 billion lower in 2015 as a result of the iron ore price fall.

The political environment in Australia is also not helping sentiment.  With a $40 billion budget shortfall expected in 2015 reforms are required to stop the unsustainable rise in Government debt.  Government expenditure will be cut and we will likely see some sort of GST reform in 2015 or 2016.  However a weak Government is struggling to gather the majority required to make serious reforms so we are left with political uncertainty.

Not all is bad though, Australia does have a strong housing market supporting the economy.  With house prices up around 10% in the major cities last year the outlook for home construction in the coming year is positive.  While the Reserve Bank wants to take some of the heat out of markets like Sydney, they will not want house price growth to slow too much as a strong housing market is an effective way to combat the headwind from mining and resources.  If it looks like the overall housing market is slowing, or the overall Australia economy deteriorates, interest rates will be cut to provide economic stimulus.

The growing value of Australian Superannuation will be positive for the share market in 2015 and for many years to come.  Australia introduced compulsory superannuation in 1992 at a minimum contribution rate of 3%.  The minimum contribution rate steadily climbed to 9% in 2002 and is 9.5% today.  Under current plans it will stay at 9.5% until 2021 and increase stepwise to 12% by 2025. 

Because compulsory super in Australia is only 23 years old, and the contribution rate has been increasing, the total value of Australian Super is expected to grow rapidly from $1.9 trillion today to $8.0 trillion in the late 2030’s.  This is an annual growth rate of around 6.5% and is underpinned by annual net flows into Australian Super accounts of around $100 billion.  About 23% of this, or $23 billion, goes into the Australian share market.  The value of the Australian share market is $1,545 billion so this $23 billion of super money would, if we make some simplifications, increase the share market by around 1.5%.  Having the growing superannuation sector providing support for the market every year is not too bad!

Finally we need to look at the share market valuation.  The market is valued at 14.2 times its earnings which is only slightly above its long run average.  Earnings of Australian companies are currently expected to grow at about 5% and pay us a dividend worth 5%.  If the market delivers this growth and holds its valuation of 14.2 times, our total return will be earnings growth plus the dividend or around 10% in aggregate.  However given the weaker economic outlook, earnings growth could disappoint and the market may decline in valuation leaving us with a return closer to 0% for the year.

This leaves us with a base case return of between 0% and 10% from Australian shares in 2015.  Of course there is always risk that a global shock such as a break up of the European Union or a collapse in China upsets the market and we have one of those bad years, but that is not the likely scenario.

Bringing this all together, Milford will maintain a moderate exposure to Australian shares as we endeavour to select favourable companies and sectors that significantly outperform the wider market.  Throughout the year we will keep a close eye on economic developments so that we can take measures to protect capital if a significant market downturn becomes probable. 


William Curtayne

Portfolio Manager

Sources: 1. Iress, 2. Australian Treasury, 3. Macquarie.